By Jen Wieczner and Scott DeCarlo
November 19, 2018

Perhaps the biggest head-scratcher for investors this year is China, which despite growing its economy nearly twice as fast as the U.S. has been one of the world’s worst-performing markets in 2018, with certain indexes losing as much as a third of their value. “China is a wild card here because they’re right in the eye of the storm when it comes to trade talks,” says Saira Malik, head of global equities at Nuveen.

Those concerns have kept Tom Hancock, portfolio manager of the $6.8 billion GMO Quality Fund, on the sidelines in mainland China for now. His only current holding in Asia is Taiwan Semiconductor Manufacturing (TSMC), which he calls “the arms dealer to the semiconductor industry” because it only manufactures (it does not design) chips on behalf of Nvidia, Apple, and other companies. That’s put TSMC in a sweet spot to gain both American and Chinese customers (the latter of which currently account for only a tenth of its sales) if a trade war escalates. It’s also more diversified than many of the chip­makers themselves, allowing it to benefit from the spread of A.I.-driven computing, smartphones, and even cryptocurrency mining, while making it less dependent on any one industry. Plus, TSMC is significantly cheaper than the companies for which it subcontracts—trading at about 17 times earnings, half the valuation of Nvidia.

Even amid a slowdown, aggressive fiscal stimulus by the government is helping ensure that Chinese consumers have money to spend, and investors are finding gems that cater to that market. Malik, for one, is bullish on Melco Resorts & Entertainment, a Hong Kong–based casino operator that trades for 20 times earnings, pays a 3.6% dividend, and is buying back shares. The company is opening new casinos to serve high-end consumers in China and beyond, who show no signs of pinching pennies. “We think Melco will outgrow the entire Macao gaming sector,” Malik says.

Tom Slater, head of Baillie Gifford’s U.S. equities team, likes Meituan ­Dianping, a food delivery service that just went public in Hong Kong in September. While it has been dubbed the Grubhub of China, its customer base is on a different scale: Meituan now boasts 310 million active users of its app, compared with 15 million for its U.S. counterpart. “I don’t share this widespread pessimism about China, but even if you subscribe to that, I would suggest that these changes in behavior are absolutely much more powerful than any cyclical swings in GDP,” says Slater.


PICKS:

Taiwan Semiconductor Manufacturing (TSM)
Melco Resorts & Entertainment (MLCO)
Meituan Dianping (HKG)


Below, the rest of “The 30 Best Stocks to Buy for 2019.”

A version of this article appears in the December 1, 2018 issue of Fortune, as part of the story “2019 Investor’s Guide Stocks and Funds: Safety Meets Strength.”

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