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How does China’s reopening affect your portfolio?

China’s reopening may just be the catalyst that is needed to stimulate global growth. What are the investment implications, and could there be some negative repercussions?

China’s reopening is excellent news for the global economy, lifting demand, and easing investors’ fears of a global recession. The IMF forecasts China to account for around 30% of global growth in 2023 and savings in China are at an all-time high. China however remains a wild card and thus investors should watch for any changes in the reopening policy. 

In that sense, the Chinese reopening is partly the reason why stock markets and particularly European assets including European stocks and the euro have had such a strong start to the year. 

What are the stocks to benefit from the Chinese reopening?

The Chinese reopening has 3 major elements to it. 

First, it’s acting as a demand shock for commodities. This is perhaps the most crowded trade now with traders heavily positioned for rising commodity prices. For example, copper is up more than 10% since the start of the year and climbed 18% since its lows in December. That is because the Chinese demand for copper accounts for about two times the demand of Europe and the US combined.

Copper 18.01.2023

There are also structural drivers such as the electrification of the global economy that are driving copper demand. Freeport-McMoRan is a popular name to trade copper, but there are also copper tracker funds. Also, stocks linked to commodities such as Caterpillar, which has just recently made an all-time high, could potentially see further gains as global demand for commodities continues to increase. 

Secondly, China’s reopening is a significant boost for the global tourism sector, which accounts for over 10% of the global GDP. Chinese travel stocks such as Trip.com which recently said it saw mainland Chinese demand for travel surge ahead of the Lunar New Year holiday season, could continue to benefit. Similarly, European and American travel stocks could also gain from Chinese demand. And perhaps they are more interesting, as Chinese stocks are now a crowded trade. 

Travel names

And a word of caution on Chinese tech stocks, such as Alibaba and Tencent which could see their stocks suffer again, in a similar fashion to how in the US, Amazon’s stock faced a downturn after some Americans stopped online shopping after lockdowns ended. 

Lastly, stock bargains could be found in high-quality stocks in terms of earnings resilience that should benefit from an improving growth outlook, without necessarily direct exposure to China. Typically, after suffering in 2022, industrial stocks trading at modest valuations could offer attractive risk-reward opportunities in 2023. Investors looking for significant bargains could extend their ‘China reopening’ trade to the largest tech stocks, as improving global growth should also lift their earnings.

Should you consider investing in casinos and luxury stocks?

China’s reopening acts as a catalyst for the revival of the Chinese consumer. For instance, nearly one million residents from mainland China have applied for entry to Hong Kong and Macau since restrictions were eased. Casino stocks such as Wynn Resorts, Las Vegas Sands, and MGM Resorts certainly benefit but after the strong double-digital percentage stock run-up, it is becoming very speculative to bet on more near-term gains. And casino stocks are particularly vulnerable to the economic cycle. 

Luxury stocks are in a secular growth trend and China’s reopening should act as a growth catalyst for many European and US luxury brands.  

Leading names include Hermes, LVMH, Kering, and Ferrari. Other top brands such as Apple and Nike could also benefit from increased spending by the Chinese middle class. 

Is the war in Eastern Europe still a key risk for your portfolio?

The war in Eastern Europe had the effect of creating a supply shock in commodity prices in 2022, causing severe inflation. Financial markets have given a very low probability of a potential nuclear escalation scenario, thus the war in Ukraine is not a significant risk for financial markets anymore. An escalation in tensions between China and Taiwan or China and the US would be much more significant. 

Could airlines be strong beneficiaries? 

The energy shock in 2022 pushed airlines to adapt by focusing on cost control and raising prices. Recent quarterly earnings from airlines such as American Airlines and Delta Air Lines point to strong demand in the fourth quarter of 2022 and higher ticket prices have helped airlines deliver higher earnings than expected. Certainly, falling oil prices could help airlines, but an overall strong economy should also boost demand for air travel, even if oil prices rise a little more. 

Are US travel stocks attractive?

US tech stocks have created attractive opportunities for quality companies such as Apple, Microsoft, Alphabet, and Amazon which saw their valuations slashed in 2022. Tech travel stocks such as well-established player Booking.com could also be an attractive long-term play but the strong recent performance points to caution and to wait for pullbacks for entry points. Expedia, which fell heavily in 2022, could also be interesting, but the smaller player is more speculative and has lower profit margins. 

Where can investors find bargains in light of China’s reopening?

As a last word, I would watch China like a hawk, to monitor the resilience of the global growth story. I would look for high-quality stocks that are trading at a historically low price-to-earnings multiple. Alphabet in that sense could potentially rebound as the global growth story improves and as businesses show signs to increase spending for online advertisement. 

In terms of travel names specifically, I would look for pullbacks in Booking.com or consider more speculative names such as Expedia or Swiss-based travel retailer Dufry which could directly benefit from a surge in the number of Chinese travelers.

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