BEIJING (Bloomberg): As China’s reopening starts to take shape, investor focus is increasingly seen shifting from frenzied stock bets to longer-term plays such as consumer and health-care shares.
Money managers are zeroing in on companies that’ll benefit from a reopening-led economic recovery instead of travel and catering firms whose shares have jumped sharply in the early days of the rally. Some are positioning for a full easing of Covid restrictions to take place by March, even if the journey toward that end may be bumpy.
"With the trajectory of the economy set to be back on track, it is time to shift focus from stocks primed to jump on short-term changes,” said Hua Tong, fund manager at Shenzhen Zhengyuan Investment Co.
"We can now afford to take the longer-term view to seek out opportunities -- and the biggest unrealized opportunity is in the consumer sector.”
November’s historic rally is being seen as a gamechanger for Chinese equities after months of gut-wrenching swings fueled by rolling lockdowns that many said were the single-biggest drag on the market. Investors are seeking potential buys as Beijing gradually relaxes curbs that combined with a property crisis made key Chinese gauges the world’s worst performers for much of this year.
Recent measures from authorities include allowing some low-risk patients to isolate at home and loosening restrictions in select cities, with the official rhetoric on Covid also coalescing around a softer tone.
"The reopening trade will be led by consumption and health care in the coming months,” said Li Changmin, fund manager at Snowball Wealth.
"Guangzhou’s surprise reopening, even with its high case count, has fired the first shot, and this could expedite the time line for ending Covid Zero.”
Li expects a full reopening to occur before China’s annual parliamentary meetings take place in March.
"Life returning to normal would mostly benefit the blue-chip names which have suffered huge valuation discounts, whereas the upside for travel and airlines stocks has been mostly priced in,” he said.
The CSI 300 Consumer Staples Index is trading close to 22 times its one-year forward earnings, compared to an average of almost 27 times over the past three years. Heavyweights such as liquor manufacturer Kweichow Moutai Co. and dairy product maker Inner Mongolia Yili Industrial Group Co. are down about 40% from last year’s peaks.
The initial leg of the reopening trade has seen more volatile stocks lead the charge. Shares linked to the travel, catering and pharmaceutical industries have been among the prime beneficiaries.
For example, Xi’an Tourism Co. jumped 37% in November while hotpot chain Haidilao International Holding Ltd. rallied 64% in Hong Kong. Shanghai Shenqi Pharmaceutical Investment Management Co. surged as much as 100% in November on speculation that a drug manufactured by the firm would be used to treat Covid patients.
Meanwhile, Moutai and Yili ended the month with gains of about 18% and 14%, respectively.
More broadly, the Hang Sang China Enterprises Index soared 29% in Hong Kong in November, the most since 2003. China’s benchmark CSI 300 Index jumped almost 10% in its best performance since July 2020. The rally has eased since, with the gauges little changed over two sessions in December.
Paul Pong, managing director at Pegasus Fund Managers Ltd. favors consumer stocks such as sportswear and car makers which are expected to beat their peers when spending picks up. "Big tech firms that have been laggards, like Alibaba and Tencent, will also outperform as they have high beta and benefit directly from a consumption recovery.”
To be sure, some still see room for a further rally in the traditional cohort of reopening plays. Manishi Raychaudhuri, Asian equity strategist at BNP Paribas, says that stocks related to tourism, restaurant chains, e-commerce, Macau gaming and retail-focused REITs may notch up more gains.
"Other Asian markets, like Thailand, also offer interesting exposures to this theme - through airports and hotel chain stocks,” he said.
All said, an increasing number of investors are setting their sights on the longer-term play even though China’s exit from Covid Zero may be fraught with challenges.
"Reversing course is going to be like walking on a tightrope, full of adjustments in both directions in the search for the most desirable solution,” said Liu Xiaodong, partner at Shanghai Power Asset Management Co.
"This means that many of the reopening plays may be prone to flip flop and end up moving horizontally,” Liu said. "If anything, I think health-care does have potential, whichever way the tide turns in the short term, people are going to need treatment.”