SHORT-TERM OPPORTUNITIES FROM CHINA’S REOPENING
On December 7, 2022, China announced major changes to its strict Covid-19 policy, the old rules slowed the spread of the virus for nearly three years but have recently sparked protests due to their harshness on the majority of the population.
Until recently, China had a zero-Covid policy, which included strict lockdowns and quarantining those who tested positive as well as their close contacts. Among the measures scrapped is the use of its primary Covid tracking app, as well as domestic travel restrictions. The government has allowed people with Covid to quarantine at home and has stated that foreign visitors entering the country will no longer be required to enter quarantine beginning January 8, 2023.
At Astra, we have not changed our long-term macro-outlook for China and will continue to be cautious in this market. Political risks and a lack of transparency make it difficult for us to recommend investing in China for a long period of time. However, in the short term, we can see opportunities, particularly for our high-risk investors who want to capitalize on the reopening of the China market.
How does this affect the market?
The reopening of China will have numerous market implications. Some are negative, such as the sudden increase in Covid cases, which can put short-term pressure on the medical system as well as disrupting output for business. However, in the medium term, easing will reduce public concern about Covid-19 and make it less of a threat, similar to what has happened in the rest of the world when they reopened.
Furthermore, increased demand for energy and raw materials will temporarily raise commodity prices. Because China is a low-cost producer, reopening will further ease the global supply chain but may have a negative impact on global inflation. However, US Federal Reserve Chair Jerome Powel downplayed the risk, saying, "It doesn't seem likely the overall net effect will be material to us."
Despite this, China's reopening presents many investment opportunities, particularly in the short term.
Improved growth expectations in 2023 may outweigh the previously mentioned unfavorable factors. Morgan Stanley upgraded its China growth forecast for 2023 to 5.4% from 5% previously. Many economists predict that China's economy will bottom out in the second quarter of 2023.
China's stocks are also among the most undervalued in the world. And, because reopening will increase demand, many sectors will benefit more than others. First off, this will have a positive impact on leisure and travel, particularly during the upcoming Lunar New Year celebrations. Increased international travel will benefit related industries such as airlines, hotel accommodation, and catering.
The surrounding region of Mainland China, particularly Hong Kong, will benefit as well. In fact, offshore markets (Hong Kong) were stronger than onshore markets (Mainland China), as mainland Chinese investors were less bullish due to the short-term Covid spike. The chart below shows that the Hang Seng Composite Index (HIS, Hong Kong) outperforms its mainland counterpart (Shanghai-Shenzen CSI 300, Mainland China).
Chinese Stock Markets. January 01, 2022 – January 05, 2023
Due to constrained demand, consumer stocks looked to gain the most after China ended its strict zero-Covid policy. They were among those most heavily affected by China's stringent zero-Covid strategy to contain the pandemic. Consumer companies have led a rally in the 4th quarter of 2022 since the easing of Covid-19 restrictions released pent-up demand.
Many Chinese technology companies are currently undervalued, so now is the best time to acquire them at a discount. Remember that China has cracked down on its big tech companies in the last two years, which has slowed the sector’s growth. What's good about Chinese tech companies right now is that they've already divested and cut costs on non-core businesses to increase profitability. It is expected that Chinese technology companies will grow in 2023, but not at the same rate as before the pandemic. Its tech companies are here to stay and acquiring them at a discount could significantly boost your portfolio's profits in the short term.
Foreign investors are especially focused on the real estate sector as they observe how politicians try to repair the battered sector, which contributes over 30% of the country's GDP. The government tried to save the industry by providing credit and liquidity injections. The demand for real estate will rise as public mobility resumes which will benefit commercial and office real estate sector. The government has also boosted the property sector through liquidity injections designed to stabilize the market which will also have a positive short-term impact.
Recommended fund: Hereford – Bin Yuan Greater China Fund
China funds 3-year chart. January 03, 2020 – January 05, 2023
The Bin Yuan Fund we are recommending has greatly outperformed its peers over a 3-year time period. Its top five sectors in order are:
1. Consumer Products – 28.00%
2. Health Care – 20.00%
3. Tech, media & telecom – 18.00%
4. Industrials – 16.00%
5. Basic Materials – 7.00%
The fund is also invested in the real estate and financial sectors. Overall, its sector weightings are consistent with the above-mentioned short-term opportunities.
If you would like to discuss this opportunity to consider if this is appropriate for you, please let us know so we can schedule a call.