China celebrates New Year on Sunday, marking the start of the year of the rabbit, a symbol for longevity, peace, prosperity and hope in Chinese culture. The year could provide some interesting investment opportunities, China specialists at Comgest and Mainfirst Asset Management said in separate notes to investors.
Mainfirst portfolio manager Frank Schwarz added a degree of caution for those bullish on China. “The relatively abrupt change of direction in China’s zero-covid strategy and the wave of omicron cases now prevailing there could exacerbate the situation again,” he noted. “Several scenarios could develop based on this situation: another lockdown would have a massive impact on global trade. And if the country were to close its borders again, this would also have a drastic impact on travel.”
Jimmy Chen, portfolio manager of the Comgest Growth China fund, which generated a negative return of 13 percent in the last year, said “some positivity” lies ahead for China with a recovery from a year of economic stress and poor investor sentiment.
‘Vast change’
“For Chinese equity, 2022 was the second tough year in a row due to China’s stringent zero-Covid strategy and regulatory crackdown on businesses as well as an escalation of geopolitical tensions,” Chen said. “The end of the year saw a vast change as the Chinese government lifted most of their Covid controls, industrial policies turned more business-friendly and progress was made to control geopolitical tensions. Meanwhile, their inflation rate is expected to stay moderate, allowing macroeconomic policies to remain loose.”
MainFirst’s Schwarz observed that international funds remain “a strong underweight” in Chinese equities at a time when this market has “a historically low absolute and relative rating”.
“A good indicator for the normalisation after the lockdowns is the metro traffic in Chinese megacities. Here, the current figures show that the normal level has almost been reached again within a week. The same applies to traffic on motorways. Domestic flights are also currently back to 82% of their pre-Corona 2019 level,” Schwarz said.
Historically cheap
Comgest’s Chen expects 2023 will be a year of growth reacceleration and investor sentiment recovery. The price-earnings valuation for Chinese equity remains cheap by historical standards, he said. “As a result, we believe that China equity is poised for strong performance in the Year of the Rabbit.”
As of 8 January China has lifted all final Covid restrictions. “The bad news is this enabled the pace of Covid infections to become fast and furious, stretching the health system. On the positive side, China is anticipated to reach peak infection earlier and economic activity should rebound faster than expected,” Chen said.
In addition, industrial policies have become more pro-business, while geopolitical tensions between China and the US have stabilised. In November, Chinese President Xi Jinping and US President Joe Biden met face-to-face for the first time as leaders in an effort to re-establish a working relationship
Companies that could benefit from China’s reopening are “long-term quality growth compounders,” Chen said, referring to Anta Sports, Suofeiya, and Focus Media, firms with leadership in areas such as sportswear, customised furniture, and advertising. Tencent, seen as China’s economic bellwether could benefit from “the normalisation” of gaming licence approvals, an improving consumer sentiment and a sanguine outlook for Chinese tech investments should. Wuxi Biologics stands to gain from a global growth trend that sees Chinese companies outsource biopharmaceutical production.
‘Revenge spending’
Mainfirst’s Schwarz said shares of tour operators, hotels, restaurants, duty-free providers and - from a European perspective - luxury goods brands such as LVMH, Richemont or L’Òréal, could be interesting options for investors bullish on China.
Before the Covid-19 pandemic, 31 percent of spending on luxury goods came from Chinese citizens. Due to travel restrictions, this figure dropped to 19 percent. “However, the wealth situation of the Chinese has continued to improve. Now we expect to see some ‘revenge spending’ on travel and other luxury items such as handbags etc. In the past, the Chinese spent about half of their luxury spending abroad while travelling and the other half at home.
“Analysts predict that global sales in the luxury sector will increase by 5 percent this year,” Schwarz noted. “With a recovery of spending in China, this figure could be 11 percent. If some of the foreign travel comes back, even 15 percent growth would be possible on average for luxury companies.”