Investing in the Year of the Rabbit
A positive outlook regarding the global economy has been lacking amongst business leaders and investors in recent months, however there are now signs of optimism.
This is mostly due to China, who entered the Year of the Rabbit in a very different place than it did the Year of the Tiger.? The sudden and welcome removal of strict Covid-19 restrictions late last year is expected to unleash a wave of spending that has the potential to offset economic weakness in the United States and Europe.??
On January 17, at the World Economic Forum in Davos, Switzerland, China's Vice-Premier Liu He welcomed foreign investment and declared his country open to the world.? After three years of pandemic isolation, Liu's pitch to global leaders made it clear China wants international investors to play a key role in reviving its slowing economy.
It was also another sign of Beijing’s increasing engagement with other countries, including Australia, where improved relations are clearing the path for China to resume imports of Australian coal (after a three year hiatus).??
In addition, last November, US President Joe Biden and China’s leader Xi Jinping met on the sidelines of the G20 summit in Bali where they reportedly spoke about managing their differences in a more constructive manner.? This in spite of the fact that Washington imposed sanctions on China’s semiconductor industry a month prior.?
There’s good reason for China to be taking a change in tack.? Gross domestic product (GDP) data shows that China's economic growth in 2022 slumped to one of its worst levels in nearly half a century, as the fourth quarter was hit hard by strict Covid-19 restrictions and a property market slump.? This is in addition to China’s wide-ranging regulatory crackdown on sectors from technology to education, which have in turn hit foreign investment sentiment.
However, gains in equity markets started to build momentum when Beijing began rapidly lifting its Covid-19 restrictions. China is now experiencing a significant uptick in economic activity thanks to the re-opening, including freight, air and train travel.? A four-week rally in Chinese equities is set to culminate in a bull market as a rebound in consumption galvanises the shares.??
Whether China's ‘open for business’ pitch will have the desired effect on global investors and leaders going forward still remains to be seen.? Below I take a look at the key themes driving investment towards, or potentially away, from China.
Travel and Entertainment
The Shanghai Shenzhen CSI 300 Index is designed to replicate the performance of the top 300 stocks traded in the Shanghai and Shenzhen stock exchanges and is weighted? for market capitalisation.
It is seen as a blue-chip index for mainland Chinese stocks.? The CSI 300 Index could extend its 19% rise from an October low when traders return after a week-long Lunar New Year break, with travel and box office data signalling that consumer spending is on the mend. Spending patterns during the Lunar New Year break are reinforcing optimism. Travellers flocked to China’s scenic destinations during the holiday, box office sales rose and bookings of hotels, guest houses and tourist spots exceeded the comparable period in 2019.? Hotel operators and restaurant chains will benefit, as well as travel firms and entertainment-related names.
At the same time, movie-related stocks such as IMAX China and Maoyan Entertainment jumped in Hong Kong when trading resumed, along with sports apparel maker Li Ning Co and hotpot restaurant chain Haidilao.
Other assets have also climbed, with the offshore yuan on track to rise for a third straight month amid bullish calls from the likes of Goldman Sachs.
Technology
Shares of Tencent have nearly doubled from their recent lows, due to indications that China is ending its crackdown on major tech firms, as well as optimism about the country’s reopening.??
Tencent has now rejoined the club of the world’s ten most valuable companies for the first time in six months.? Since October, the company has risen about 95% in Hong Kong as approvals for industry funding and new games have begun to trickle in again. In a major tailwind for the industry, some policymakers have called for a halt to China’s harshest regulatory curbs.
Alibaba shares have jumped 85% in a similar fashion, also reflecting broader investor optimism about China’s pro-growth policies and reopening.? The dramatic rebound in the Hang Seng Tech Index over the past three months indicates that the sector is regaining clout in investor portfolios.
Manufacturing
Chinese manufacturing is very efficient due to the amount of ‘factory cities’ - self-contained campuses that include factories, warehouses, office spaces, and housing.
Since the 1990s, these campuses have appeared in coastal provinces like Guangdong, Zhejiang, and Jiangsu, with workers recruited from inland provinces such as Shanxi, Henan and Hubei. The coastal provinces made early heavy investments in infrastructure that supported the export trade, including roads and container ports. All this culminated to make China the workshop of the world.
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However, China's role in global manufacturing is under pressure as more companies look to Vietnam and India. ? The speed of supply chain migration to India has been accelerating due to the need to diversify risks in light of uncertainties in China’s pandemic control.? India, which surpassed the UK last year to rank as the world’s fifth-largest economy, is already predicted to account for up to 25% of Apple’s total iPhone production by the end of 2023, and as much as 40% by 2025.
China, where up to 85% of iPhones globally were produced last year, is also at risk of losing its dominant role as a manufacturing hub for Apple devices because of US-China decoupling moves.
Chip Wars
By implementing tough controls on the export of American chip technology, the US aims to impede China’s efforts to develop the high-end semiconductors required for artificial intelligence and supercomputing.
In addition, the Netherlands and Japan look likely to abide by the sanctions that the US has imposed on Chinese chip makers.? As the Netherlands is home to ASML Holdings - the only semiconductor company making lithography machinery used to make the latest generation of semiconductors - this effectively means that China will no longer be able to make the latest semiconductors, and can neither develop next-gen chips.
Investing in China
Investing directly in China is difficult, but it can be done via Morgans and the Hong Kong exchange (for example, Morgans clients can invest in Tencent and Alibaba). ?Recent outperformance in Chinese markets aside, from a portfolio perspective, it’s always prudent to have a diversified portfolio.? Below I’ve highlighted two ETFs that give investors diversified exposure to China.??
Please do not hesitate to contact me regarding your investment strategy for 2023 and for more investment insights straight to your inbox, you can sign up for my monthly newsletters here.
VanEck China New Economy ETF
CNEW gives investors access to a portfolio of fundamentally sound companies in China having growth prospects in sectors making up ‘the New Economy’, namely technology, health care, consumer staples and consumer discretionary. Download factsheet
VanEck FTSE China A50 ETF
CETF gives investors exposure to a diversified portfolio comprising the 50 largest companies in the mainland Chinese market. Diversified across companies and sectors, the fund is comprised of companies considered to be pillars of the Chinese economy and leaders in their sectors. Download factsheet
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