HSBC stock: Your safest bet to play China's new stimulus?

If you're looking for a way to bet against the consensus, where many underground investors seem to go today. The deal on the table, which can potentially become the next addition to your watchlist, is China. Remember, though, that not all Chinese stocks are equal.

History shows that penny and financial stocks are typically the first to turn with a new economic cycle. Now, plenty of markets suggest that the turnaround for China's economy may finally be here after years of compression and driving investors away from it. Everyone will admit that penny stocks in China are too risky, but what about financials and consumer stocks?

Stick around and discover why stocks like HSBC Holdings PLC NYSE: HSBC can be a potentially good, healthy bet in your portfolio for the seemingly turning Chinese economy. More than that, if buying a diversified ETF is your style, you can look at what Ray Dalio has been quietly buying: the iShares MSCI China ETF NASDAQ: MCHI and much more.

Macro forces at play 

Dalio wouldn't be Dalio if he didn't look at the macro picture, as his hedge fund, Bridgewater Associates, needs to ensure sufficient exposure to the many trends happening in the world and be picky due to their size.

So what attracted this legendary Wall Street name to look at the Chinese markets when everyone else avoids it like the plague? For starters, yield. The Chinese ten-year bonds offer a roughly 2.5% yield, making equities a more attractive investment — for those with the stomach — due to their relative undervaluation.

Looking at the iShares China ETF, you will note that it has paid its shareholders a dividend yield of 3.9%, making it the biggest payout in over eight years! As the fund holds up to 661 stocks, isn't this the cheaper way to enter the Chinese market?

When stocks offer yields above those of the 'risk-free' rates found in government bonds, investors look for potential investment opportunities in stocks as the bonds are no longer attractive. Knowing what you know now, a coming capital shift out of fixed-income and into stocks is where the China bet is.

Because HSBC is the outlier in banking stocks with the most exposure to Chinese markets, it can be a potentially good bet for your portfolio if you believe a new flood of cash may be coming.

Specifics 

HSBC stock is coming to break the mark with its 5.3% yield today. Analysts are bullish on the name and their earnings-per-share projections. An 11.9% growth projection in EPS is no joke for a bank stock.

Banks talk to each other, of course, and HSBC could be one of the most straightforward ways to play the comeback in China, given the bank's exposure. This may be why Morgan Stanley NYSE: MS, the bank's largest shareholder, upped its stock stake by 0.9% in the past quarter.

So you have a safe way to approach this in the China ETF, and you now have a bit riskier way to focus your energy in a specific play like HSBC bank, which isn't that much of a risk considering the stability and dividend yield to be found in the name.

But, there is one specific stock you can consider adding to your watchlist: if you have a bigger risk appetite and don't mind putting your eggs in one Chinese basket, such as Alibaba Group NYSE: BABA, a stock that has traumatized shareholders in the past year with its ups and downs.

Remember, Alibaba is a pure recovery play directly connected to the Chinese consumer activity level, showing some signs of recovery after the government proposed another $139 billion in bond issuance to stimulate the economy. As measured in December data, retail sales rose by 7.4% over the past year.

While GDP growth missed economists' expectations, China's economy did grow by 5.2% in 2023. All accounted for is a massive mispricing in the ETF and subsequent stocks for the country, the straightforward monetary policy with a growing yield spread between bonds and stocks.

Any other market, without China's negative sentiment, and stocks would be making headlines of breaking new highs.