Chinese markets could be the winners. Tips for proceeding with caution
China’s reopening has reinvigorated broader interest in foreign investment, and strategists expect it to offer rewards for investors in its own markets and beyond this year. Strategists see China markets easily posting double-digit gains this year. Hong Kong’s Hang Seng is up just under 10% since the start of the year, while mainland markets, such as Shanghai, are up about half that number. But strategists also warn that the China story may ultimately not be all that is hoped because of the continued spread of Covid and the difficulties of re-engaging the economy with the world. “I still see China as a business, not an investment,” said Jimmy Chang, chief investment officer of the Rockefeller Family’s Global Office. “It’s not surprising that more people are warming up to China, given that there are concerns about a potential recession here in the US. People want to find positive catalysts all over the world.” The case for investing outside the US is strong, especially with the dollar off its highs and looking to drop further. The iShares MSCI Emerging Markets ETF, which includes Chinese companies, is up 8.5% year-to-date, while the S&P 500 is up less than 2% in early 2023. On a forward-looking basis throughout the month, international markets are currently trading At a valuation discount of 29% compared to its US counterpart – the widest level in more than 15 years.” “For long-term investors, we recommend taking advantage of current cheap valuations and diversifying portfolios outside the US” China, US relations are warming. China’s lack of covid-19 since late last year has sent ripples across global markets Strategists expected trade opportunities to improve and extend to countries like Germany, Japan and some emerging markets The major policy shift also comes as the Chinese leadership is showing signs of warming to The United States, for example, Chinese Vice Premier Liu He spoke at the World Economic Forum in Davos this week and met separately with US Treasury Secretary Janet Yellen. Kher. Ed Mills, Washington policy strategist at Raymond James, said the goal of improving US-China relations has been clear since the G-20 meeting in July. Secretary of State Anthony Blinken will reportedly visit Beijing and meet with his Chinese counterpart, Foreign Minister Qin Gang, on February 5-6. He said. Mills said Chinese President Xi Jinping and President Joe Biden may meet in the fourth quarter. Beyond trade, relations between China and the United States were particularly thorny when former House Speaker Nancy Pelosi visited Taiwan in August. China has warned her not to visit. A new embargo on Taiwanese goods has also been imposed and military exercises have been conducted near Taiwan. China has said Taiwan is part of Greater China, and the United States has repeatedly warned it against annexing the country. “Some of the tensions have cooled,” Mills said. “The question is: Do you get more relief from here, or do they flare up again?” “I don’t think we have an answer to that yet.” China’s Ministry of Commerce said Liu and Lin discussed US economic and technological policy. Last fall, the United States imposed restrictions on American companies and individuals working with Chinese partners on cutting-edge semiconductors. This action came after the Trump administration placed specific restrictions on SMIC and Huawei. Also, tariffs imposed by the Trump administration on many Chinese goods remain in place. Reopening a turning point China’s resurgence from lockdowns could spur more trade and economic activity around the world. It will also create more demand within China. Strategists point to the potential for other countries in the region that trade with China to benefit, including Korea and Australia. “While China’s reopening is undoubtedly a turning point, there are still reasons for caution,” the equity strategists at Barclays wrote. “Zero-COVID was just one of a host of challenges to China’s growth prospects in 2023, which still include a deep contraction in the real estate market, slowing exports and US restrictions on semiconductors. Reopening begins to pave the way for Chinese consumption to recover,” But more than 60% of household wealth remains tied up in the weak housing market. But the prospects for the Chinese economy are still much brighter than they were just a few months ago. After the macro tightening and regulatory crackdown in 2021, the government is now working to stimulate the economy. Economists have raised their growth forecasts for the Chinese economy after the country ended its zero Covid policy, with the Bloomberg consensus now at 5.1% for GDP growth in 2023. The economy grew 2.9% year over year in the fourth quarter. There have been some upside surprises in the economy, including recent data on retail sales and the labor market, said economists at Citigroup MCHI, MCHI 1Y line. A reopening that came earlier than expected could mean a faster recovery, and they say their forecast for 5.3% year-over-year growth in 2023 could be too low. Citigroup has overweight on China. “If there’s a big improvement in earnings basically at the start of a new cycle, we could easily see a 20% gain in China this year,” said Stephen Whiting, chief investment analyst and chief economist at Citi Private Bank, referring to MSCI China. . The iShares MSCI China ETF is up 12.4% year-to-date, but below its highs earlier this month. The KraneShares CSI China Internet ETF is up 12.6% for the year so far, while the iShares China Large-Cap ETF is up 12.2%. China Internet Line KWEB 1Y Even as Covid spreads quickly across the country, Wieting said he expects China to remain open and continue to move forward. “China can’t be locked down again,” he said. He noted that the country is facing internal pressure from citizens protesting the restrictions. “China has seen lockdowns that create more health problems and economic activity in the country than allow the spread of what they think is a less deadly version of the virus,” he said. “With the high contactability, you can’t easily put it back into the bottle.” Where to place bets Wieiting said American investors can invest in China through its largest companies. Some of those are the iShares Emerging Markets ETF’s largest holdings. For example, Tencent Holdings, Alibaba, and Meituan are among the five largest companies it owns. Earlier this week, Goldman Sachs said the best way to play the recovery in China is to bet on the Chinese consumer with e-commerce giant Alibaba. The stock is up 31% since the start of the year. BABA 1Y line baba Wieting said it has been actively looking for opportunities in global markets, as a way to diversify outside the US, but some investors have recently been drawn to overseas opportunities as the US market appears to be underperforming. Another way to play with China is through US companies doing business there. For example, Coca-Cola CEO James Quincy told CNBC this week that the end of lockdowns is good for business. “What matters to our business is the mobility of consumers in the country. There is clearly an increase in mobility, so that will be beneficial for us,” he said. “I’m sure the trajectory of reopening will be very similar to that of the United States and Europe.” Equity analysts at Barclays said China’s reopening should have a limited impact on the US market. While S&P’s international revenue exposure is 30%, they find that only 2% of that is direct revenue exposure in China. Among the companies Barclays has identified doing business with China are Las Vegas Sands, Starbucks, Western Digital, BorgWarner and Tesla. Paul Christopher, head of global market strategy at Wells Fargo Investment Institute, said he still favors the US but is looking at other markets. “What we would say to conservative investors in particular is to look out for multinationals that have a relationship with China. If they operate there, the Chinese need them there,” he said. Businesses in areas such as pollution control and healthcare can benefit. In the long run, financial firms can also benefit. “In the future, when they are going to open up, American and European companies on the ground will be there,” he said. On the other hand, US tech companies have been operating in China for a long time and face regulatory risks, including Chinese antitrust laws. Companies like Apple, which has a huge manufacturing footprint in China, are actively seeking to move some operations away from China. “Warrior wolf to wolf in sheepskin,” said Chang, CIO of the Rockefeller Global Family Office. “We are suddenly getting these warm, fuzzy references from China, but the thing to watch is that it doesn’t really change the subject.” “You have this transition from wolf warrior to wolf in sheepskin, trying to play nice.” Zhang said companies and investors were quick to embrace the change. “They want to go back to China, business as usual, resolve intentions, and improve relations,” he said. But he said investors should consider the politics. “[House] Loudspeaker [Kevin] He said McCarthy created the committee with the aim of countering the growing threat from China. And I don’t think Xi Jinping himself has changed his long-term agenda, his dream of China, and his long-term ambition. The Covid shutdown has hurt the Chinese economy, they want to get back on track for growth in 2023. “Well Fargo Christopher said it’s starting to reexamine emerging markets.” We continue to favor the United States and we remain focused on quality defensive acquisitions, especially for long-term investors, he said. “If the world does not teeter on the brink of recession the way we were thinking it did late last year, the main beneficiary could be cyclical overselling, such as emerging markets,” he said. “It doesn’t look like it’s going to happen yet.”