Expert Opinion: The Reopening of China is Good for Stocks Abroad
Jan 18, 2023
Chinese stocks have already risen more than 50% since late October as Beijing rolls back measures that have hurt stocks in recent years, such as zero-Covid regulations and crackdowns on the Internet and real estate. But Chinese politicians are singing a different tune, encouraging growth and relaxing rules for real estate developers to stabilize the real estate market.
This raises investor sentiment and prompts strategists such as Mark Haefele, chief global investment strategist at UBS Wealth Management, to call China the "most preferred" market in Asia and to advise investors to look at Chinese companies operating in the consumer, Internet, pharmaceutical, medical device, transportation, capital goods, and materials sectors.
However, some investors are still hesitant to put money into a market that was judged uninvestable just a year ago. Domestic measures took billions off the market capitalization of widely held Chinese firms, while sanctions imposed on Russia following its conflict with Ukraine made investors nervous about what may happen if China moved on to Taiwan.
For such investors, another option to profit from China's resurgence is to identify potential beneficiaries elsewhere in the world. In a note to clients, Gavekal Research's Louis Gave writes that the lifting of Covid limitations elsewhere in the globe has often powered a quarter or two of double-digit nominal GDP growth as consumers make up for lost time and some businesses overspend.
"The vengeance consumption should be epic, especially as China's openness coincides with a rising bull market in equities, which over the following year will likely raise ostentatious expenditure even more," Gave wrote.
The apparent winner is travel. Citi analysts predict that China's domestic travel market will rebound to more than 85% of pre-Covid levels by the second half of this year. In comparison, outbound travel will recover to 60% of pre-Covid levels.
John Paul Lech, managing director of Matthews Asia's developing markets stocks and emerging markets ex-China strategies, sees potential in Thailand as Chinese tourists plan vacations after being confined at home for three years. While obvious winners such as airports have already recovered, he sees changes in areas such as hospitals, which may see a comeback in medical tourism.
European luxury goods producers such as LVMH Mot Hennessy Louis Vuitton (MC.France) can profit from Chinese tourism being resumed — and China's recovery should boost other economies, according to Lech. China accounts for a far higher portion of the company's sales than US multinationals such as Lululemon Athletica (LULU) or Starbucks (SBUX).
More Chinese passengers scheduling air travel, as well as a broader economic rebound that is affecting China's neighbors, bode favorably for energy consumption. According to Lech, this should benefit firms such as Australia's Woodside Energy Group (WDS), which sells all of its natural gas online to Asia.
A rising Chinese economy is also good news for Korea, which was one of Asia's worst-performing markets last year due to concerns over memory chip pricing and excess inventories.
But as cross-border travel reopens, Herald van der Linde, head of HSBC Asia-Pacific equity strategist, recommends clients give the market another look. "Return of Chinese inbound traffic with surplus savings should help the domestic economy, especially the duty-free operators and convenience stores," van der Linde writes.
While it may take time for IT demand to revive, van der Linde believes that many of the concerns are already represented in valuation, with the FTSE Korea trading more than 17% below average and funds reducing their exposure to the sector to a five-year low. The iShares MSCI South Korea exchange-traded fund (EWY) has gained over 10% this year.
Europe is another beneficiary, with Barclays strategists stating in a note to clients that profit growth in European shares is significantly more sensitive to changes in the economic backdrop for developing countries than in US equities. One benefactor will be industrial-heavy Germany, which will benefit when China's economy recovers.
The larger backdrop for foreign and developing market stocks is also improving, with the US currency losing some of its recent gains. After a 15-year period in which the US dollar, equities, and bonds dominated the rest of the globe, JPMorgan's global head of research, Joyce Chang, advocated transferring some strategic portfolio holdings to foreign companies in a letter to clients.
One major reason is that they believe the recent strong dollar regime is coming to an end, as it has become very expensive, and that conditions are improving for developed and developing market currencies to strengthen against the dollar over the next decade. The iShares MSCI AC World Index ex-US ETF (ACWX) is one easy approach to obtaining broad global exposure. It is up 7.5% this year. For investors who have stuck close to home, China's openness may be an opportunity to look further afield.
Expert Opinion :
"US/EU economies cannot function without China. There is, however, a targeted war on the bleeding edge technologies to contain it. But how that evolves is yet to be seen."
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