China announced last week a shortening of its quarantine requirements, while simplifying travel rules and adjusting its surveillance regime. The news raised hopes that the country could soon materially roll back its draconian Covid restrictions, widely considered the toughest in the world. China has remained firm on its zero Covid policy even as countries around the world adopt a “living with the virus” approach. Investors applauded the latest announcement. The Hang Seng Index jumped 7.74% on Friday after the news, while the Shenzhen Component and Shanghai Composite climbed 2.12% and 1.69% respectively. Fund manager Brian Arcese believes the market reaction reflects the “underlying fundamentals that earnings are really going to start to improve.” He expects the impact of earnings revisions to materialize in the first quarter of 2023, with the earnings improvement materializing in the “second or third quarter of the year.” How to play the reopening Goldman Sachs estimates that a full reopening could drive Chinese stocks up 20% and has identified Chinese stocks that are well positioned to benefit from the easing of social distancing and travel restrictions. Jun Bei Liu, portfolio manager at Tribeca Investment Partners, said last week’s changes to Covid restrictions mean the reopening of trading “is finally going to take off”. “Like the playbook we’ve seen in other markets, Covid losers are going to rally significantly over the next 6 months, although it’s going to be uneven to begin with,” she said. She identified the “losers from Covid” – such as the consumer and travel sectors – as “big beneficiaries”, adding that the real estate sector will be an indirect beneficiary. Meanwhile, Arcese, who is a portfolio manager at Foord Asset Management, said the company has around 20% exposure to China. One of its top picks for playing China’s reopening is online travel platform Trip.com. He noted that the company has 1.3 million hotels listed on its network, the largest network among its peers. It also works with more than 300 airlines operating in 200 countries, he added. “While Meituan has taken share in lower-tier cities, Trip.com remains strong in high-end/upper-tier cities. It has also fought back, driving adoption in lower-tier cities through an effort in online to offline with over 6,000 offline stores,” Arcese said. More than 12% of the $368 million Foord Global Equity Fund managed by Arcese is allocated to three stocks of Chinese companies: Tencent, Alibaba and JD.com. While not direct reopening games, Arcese said these actions offer the opportunity to capitalize on Chinese consumer growth and a recovering Chinese economy. In a Nov. 13 memo, Morgan Stanley’s China chief economist Robin Xing said he expects a full reopening of China in the spring of 2023 “at the earliest.” But the investment bank has identified “beneficiaries of China’s reopening” as one of its “key businesses for 2023”, according to equity strategist Laura Wang in a separate memo from the same day. Morgan Stanley’s re-opening beneficiary slate is expected to deliver positive earnings growth in 2023 and 2024. They also have at least a 10% upside from their current stock price and are overweight the bank. Unsurprisingly, the list includes several stocks in the consumer space. These include Chinese online shopping platform Meituan, sportswear companies ANTA Sports and Li Ning, luggage maker Samsonite International and casino operator Wynn Macau. Hong Kong’s flag carrier Cathay Pacific is also on the list. But Qi Wang, CEO of Chinese A-share fund manager MegaTrust Investments, warned that “it is too early” to play the reopening theme, with the reopening process expected to be “unstable and non-linear”. This will make stock trading more difficult given the high volatility, he said. “Having said that, we like China Tourism Group Duty Free as a virtual monopoly in domestic and international duty-free shopping. It should benefit from the reopening of China as tourism gradually returns to pre-Covid levels,” said he added.
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