With Less To Drag On China's Economy, Here's Where To Look For Opportunities

With Less To Drag On China's Economy, Here's Where To Look For Opportunities
Russell Burns

over 1 year ago4 mins

  • China’s economic outlook has begun to brighten, with the government announcing a series of measures aimed at reducing the country’s Covid restrictions and bolstering its struggling property sector.

  • The new measures are expected to be good for the Chinese economy and could drive up demand for commodities. Copper is one of the metals most exposed to China’s economic recovery.

  • The new measures are also likely to encourage an uptick in Chinese consumer spending. And that could be particularly good for European consumer discretionary companies.

China’s economic outlook has begun to brighten, with the government announcing a series of measures aimed at reducing the country’s Covid restrictions and bolstering its struggling property sector.

The new measures are expected to be good for the Chinese economy and could drive up demand for commodities. Copper is one of the metals most exposed to China’s economic recovery.

The new measures are also likely to encourage an uptick in Chinese consumer spending. And that could be particularly good for European consumer discretionary companies.

Mentioned in story

For the past year, China’s economy has been burdened by twin crises – one brought by stringent Covid restrictions and the other by its hugely inflated and debt-laden property sector. But the government’s sweeping new measures on both fronts may soon lift some of the burden and get the world’s second-biggest economy moving again. And that could be good news for your portfolio…

What’s new here?

In the past week, the Chinese government has announced new policies aimed at easing the country’s strict Covid quarantine and testing mandates, and at bolstering its property sector.

The 16-point set of measures for the property sector gives financial support and extended loans to deeply indebted housing developers, and lowers the deposits needed for home buyers. The rules aim to improve both supply and demand in the sector, an important one for the Chinese economy.

And the government’s 20-point set of new Covid rules, meanwhile, shrinks the length of time that people are forced to spend in centralized quarantines, ends penalties to airlines that bring infected travelers to the country, reins in mass testing, and promotes vaccines. In short, the rules are likely to result in freer movement into the country and throughout the country – and freer spending.

The expectation here is for a broad-based economic recovery with a strong rebound expected in consumer demand, including autos, travel-related and leisure industries, hospitality, as well as casinos – similar to the post-lockdown booms that were seen across the US, Europe, and elsewhere.

The impact will be global. China is a key global manufacturer of tons of goods, and a major trading partner for Europe and the US, so as Chinese manufacturing fires back up again, it could ease some lingering supply chain issues, potentially driving inflation lower in the US and elsewhere while boosting global economic growth. With the global economy facing a sharp slowdown and a possible recession, that comes at a welcome time.

So, what’s the opportunity?

There are quite a few. Investment bank Morgan Stanley is forecasting a sharp rebound in annual economic growth in China to 5%, from this year’s likely 3%. And it’s betting that those easing Covid restrictions will result in a massive resurgence in consumer consumption in the next year.

If you agree, you could consider buying the Kraneshares CSI China Fund ETF (ticker: KWEB US; expense ratio: 0.7%). The ETF tracks the CSI Overseas China Internet Index, whose mostly internet-related Chinese companies would be expected to benefit from that newly buoyant consumer demand.

You could also look further afield, because the rebound is likely to have spillover effects around the world. China is Europe’s biggest trading partner for both exports and imports, so an improving Chinese economy would provide a welcome boost for Europe’s economy – especially across its luxury goods, materials, industrials, energy, and auto industries.

You could consider investing in companies like Richemont (CFR), whose luxury-goods labels include Cartier; LVMH (MC), owner of Louis Vuitton; and Kering (KER), parent of Gucci. The business models for these couture names tend to be a lot more recession-proof than most of the consumer-goods sector, because their wealthy customer base is less likely to be impacted by a recession or cost-of-living crisis. If you prefer an ETF, the iShares MSCI Consumer Discretionary ETF (ESIC LN; 0.18%) is one to consider: its largest two holdings are LVMH, and Richemont. You could also consider investing in BMW (BMW) and Volkswagen (VOW), both of which sell a lot of cars to China’s more affluent consumers.

What’s more, as the Chinese economy gets up and running again, it’ll regain its notorious appetite for commodities. And that’s likely to boost the price of copper, in particular. See, as Reda explained here, the versatile metal is seeing lower-than-normal inventories but persistently strong demand from electric vehicles and electrification. That’s partly why both BHP Group (BHP) and Rio Tinto (RIO) have identified copper as a "core strategic asset" and are looking to make acquisitions in the area. You could consider investing in the United States Copper Index Fund (CPER; 0.80%) from the US, or in the WisdomTree Copper ETF (COPA; 0.49%) from Europe. Or, for more diversified metal exposure, you might consider investing directly in BHP or Rio Tinto.

But keep an eye on how things unfold from here. If China’s new Covid measures continue to cap economic growth and movement, or if the housing sector remains sluggish, you may want to take a more cautious approach.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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