Milk, Games and Movies: China Stocks to Watch in 2014

China's domestic stock market recorded another disappointing year in 2013, with Shanghai clocking in as Asia’s worst-performing market.

But investors shouldn't be disheartened looking ahead to 2014, fund managers say, noting that the nation's demographic changes, consumption potential and reform plans will open up plenty of opportunities to make money this year.

One area to watch: dairy products. The government's relaxation of its one-child policy and antitrust measures targeting international competitors are both good news for the domestic milk industry, Bank of Communications Schroder Fund Management Co. said in a recent research report. Retail prices of China's dairy products rose 5.7% in 2013 on-year, up from an increase of 3.2% in 2012, data from the National Bureau of Statistics showed—faster than inflation, which clocked in for the year at 2.6%.

The relaxation in the one-child policy and the inevitable baby boom it will bring mean more than just good news for milk makers.

"When the babies grow up, what do they do? They play online games," Shen Nan, an economist with Schroder said at a news briefing to release the report.

The fund manager recommended stocks linked to the animated and online games sector, especially the nation's mobile gaming industry, which saw exponential growth in 2013. The number of China's mobile gamers surged 248% in 2013 on-year to about 310 million, and the sector's total sales revenue climbed 247% from a year earlier to 11.24 billion yuan ($1.9 billion), according to media-research firm EntGroup. 

Meanwhile, as China presses ahead with urbanization, consumers in smaller cities are likely to spend more on entertainment, like going to the movies, the fund manager said. That industry has tremendous growth potential: on average, Chinese people go to movie theaters less than once a year, far below levels seen in more developed economies, it said.

The government has also taken measures to improve medical services at the nation's county levels so patients won't have to travel to large cities for treatment of serious illness, which is likely to create expansion opportunities for the medical care providers, the fund said.

More than 170 counties throughout China have experimented with medicare reforms by standardizing fee-collection systems and purchasing better medical equipment, the nation's health ministry said.

–Liyan Qi

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