The first leg of the re-opening trade has benefited stocks focused on areas like travel and lodging, one portfolio manager says.LAM YIK/Reuters
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Harsh regulatory crackdowns, geopolitical tensions over Taiwan and a lengthy zero-COVID-19 policy reversed swiftly only last December have raised questions as to whether China’s stock market is investible.
Despite these unsettling events, North American fund managers have become more upbeat on certain Chinese stocks lately – at least for the shorter term. And they see the pullback from the sharp, re-opening rally that peaked in late January as a buying opportunity.
“We are very bullish on China from a cyclical perspective,” and that’s for the next 12 to 18 months, says Matthew Strauss, senior vice president and portfolio manager with Toronto-based CI Global Asset Management.
“The China re-opening trade provides a very important and definite stimulus to the economy,” he says. After that, “we’ll see if the Chinese government continues to embrace the private sector.”
China’s growth target of about 5 per cent for this year – above the 3 per cent recorded in 2022 – is “highly achievable and might even overshoot,” says Mr. Strauss, who oversees CI Emerging Markets Fund.
In the first quarter, the world’s second-largest economy began coming to life. China’s gross domestic product (GDP) grew by a better-than-expected 4.5 per cent, with retail sales surging 10.6 per cent.
Mr. Strauss says his fund is now overweight Chinese/Hong Kong stocks at 38 per versus almost 33 per cent for MSCI Emerging Markets Index.
The first leg of the re-opening trade has benefited stocks focused on areas like travel and lodging, he says. In these sectors, he owns online travel company Trip.com Group Ltd. TCOM-Q and hotel-chain operator Atour Lifestyle Holdings Ltd. ATAT-Q.
But his fund is invested more heavily in retail and consumer names that he expects will do well in the second leg of the China re-opening.
“It’s where there’s value, and where we expect significant returns,” he says.
E-commerce giants Alibaba Group Holding Ltd. BABA-N, which had been a prime target of China’s regulatory crackdown, and PDD Holdings Inc. PDD-Q are among his retail holdings.
Alibaba’s recent announcement that it plans to split into six units indicates “to us that [the Chinese government] is getting toward the end of the regulatory clampdown on the e-commerce sector,” he says.
His fund’s consumer names include sportswear manufacturer Li-Ning Co. Ltd. LNNGY and liquor giant Kweichow Moutai Co. Ltd.
Infrastructure and housing-related stocks should benefit in the third leg of the re-opening trade that is expected later this year, but their shares prices could rally earlier in anticipation of this phase, he adds.
Among his picks, he likes heavy equipment manufacturer Sany Heavy Industry Co. Ltd., and Haier Electronics Group Co. Ltd., a manufacturer of home appliances and consumer electronics.
China has ‘very low inflation’
Arup Datta, senior vice president and portfolio manager with Mackenzie Investments in Boston, also agrees that China is investible – at least for the next three to four years.
“The tailwind is behind China,” says Mr. Datta, head of the global quantitative equity team and who oversees Mackenzie Emerging Markets Fund and Mackenzie Emerging Markets Fund II.
The regulatory crackdown seems to be over, Chinese stocks are very cheap in terms of valuation, and the country is focused on boosting its economy, he says.
China is also at a different part of the economic cycle with very low inflation, whereas most developed countries are fighting inflation and their central banks are raising interest rates, he notes.
His funds now have an overweight 36 per cent in Chinese equities based on a bottom-up, stock selection approach. Electric vehicle maker Byd Co. Ltd. ADR BYDDY “has been a big win for us,” Mr. Datta says.
He also likes oil refining giant China Petroleum & Chemical Corp. SNPMF, better known as Sinopec. China’s re-opening should lift oil prices, but the impact of a possible recession is unknown, he says.
His holdings in Shanghai-listed telecom operator China United Network Communications Group Co. Ltd., and telecom tower provider China Tower Corp. are both a re-opening and 5G telecom play.
For Mr. Datta, the biggest risk to investing in China is President Xi Jinping’s “common prosperity” program aimed at distributing more of the country’s wealth to the poor. It’s a noble goal, but “detrimental for stock markets,” he says.
That policy objective has been associated mostly with the government’s regulatory crackdowns on the education, entertainment, and technology sectors in recent years.
Mr. Xi has not talked much about his common-prosperity goals lately so there’s the question as to “whether those are his firm, long-term beliefs, and will they come back a few years later,” he says.
China also has “a bit of a real estate bubble” so the question is how the government is going to deal with it and manage a soft landing, Mr. Datta adds.
“Real estate is a big part of the economy,” he says.
Three ways to play China’s re-opening
Tyler Mordy, chief executive officer and chief investment officer at Kelowna, B.C.-based Forstrong Global Asset Management Inc., has a positive outlook on the Chinese market for at least the next one to three years.
“It’s definitely more of a tactical, cyclical view,” says Mr. Mordy, who oversees portfolios using exchanged-traded funds (ETFs).
“There’s a consumer-led recovery with this unleashing of pent-up household savings and household demand.”
As the economy reaccelerates, it’s “the sweet spot for any equity market,” he says.
“You have depressed valuations, earnings set to improve and a policy environment that has turned stimulus, so you’ve got this triple-merit scenario happening.”
With the recent slide in Chinese equities, “it’s a buying opportunity,” he suggests. The Chinese stock market should be much higher over the next year, but “the expectations are still low for the country now.”
Forstrong is playing the China re-opening in three ways, he says.
For direct exposure to the Chinese market, the firm holds KraneShares Bosera MSCI China A 50 Connect Index ETF KBA-A, which tracks 50 large-cap stocks in China’s mainland markets.
“It’s very much a domestic demand play,” he says. While China’s market is dominated by state-owned enterprises, “the [initial public offering] market is also booming, and the upshot is that Chinese market will come to resemble the underlying economy more closely.”
But China also needs to show improvements in accounting standards, corporate governance and the overall operating environment in the private sector, he adds. “It has always been a policy-driven market.”
It is also possible to get exposure to China’s re-opening by investing in sectors or countries in the Asia-Pacific region that can benefit from China’s business cycle, he says.
For instance, Forstrong owns iShares MSCI South Korea ETF EWY-A. A key South Korea export to China is semiconductors, which has been in a demand slump since 2019 but has a replacement cycle of every 36 to 48 months, he says. This ETF is about 36 per cent invested in areas such as electronics technology and semiconductors.
A third way to play China’s re-opening is by investing in other countries with leverage to its economy, he adds.
Forstrong has invested in iShares MSCI Brazil ETF EWZ-A, which can benefit because China has been Brazil’s largest trading partner for 14 straight years, he says.
Although the Chinese market is attractive in the shorter term, Mr. Mordy’s longer-term bullish case has downshifted due to geopolitical tensions about China potentially invading Taiwan, the world’s dominant maker of semiconductors. That has caused the U.S. and other countries to restrict exports of advanced chip technology to China.
“The longer-term risk surrounds the desire of many Western countries to contain China’s growth,” he says.
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