China Investments: What opportunities the country offers for investors

by Julia Groß, Euro am Sonntag

uo get into the “closed loop” of the Olympic Village, athletes have taken on a lot in recent weeks: three negative PCR tests, two weeks of daily health diaries, those who are not vaccinated even have to stay in China for three weeks after entering China Quarantine. The authorities use a daily PCR test to decide whether athletes are actually allowed to enter the Beijing National Stadium today for the opening ceremony of the 24th Olympic Winter Games or to compete in their discipline.

The world is watching China these days. In addition to top athletic performance and the sensitive issue of human rights, there is one question in particular: Can the world’s second largest economy manage to keep the major sporting event from becoming a superspreader event?

risk to the global economy

A lot depends on this – also for investors. The world economy is closely linked to the fate of China. If Beijing reacts to an increase in cases with strict lockdowns and company closures as part of its zero-Covid strategy, the rest of the world will also be affected. Germany in particular, which gets more goods from China than from any other country. Renewed lockdowns “could become a bottleneck for global supply chains and fuel a recession in certain sectors of German industry,” warns the Federation of German Industries (BDI). The analysis company Prognos has calculated that German growth in 2022 could be halved to 2.1 percent in extreme cases as a result of Chinese corona measures.

The further development of the pandemic and the way the government is dealing with it also mean a decisive step for the economy and the stock market in China. Because this has far-reaching consequences for the economic growth of a good five percent targeted for 2022, for monetary and fiscal policy and for the continuation of the regulatory agenda. The coming weeks will show whether Chinese stocks will continue the slide of the past few months – or, at least in certain sectors, turn back to winning ways. An indication of the optimistic variant: the MSCI China has only 0.8 percent lost, while the stock market barometer MSCI World, S & P 500 or DAX three to four percent in the red to lie.

That makes perfect sense, because the signs for a positive development are actually very good. “China is taking a completely different path to the rest of the world,” says Sean Taylor, DWS chief investment strategist for Asia Pacific. The government therefore has a lot of room for manoeuvre: there have been neither significant interest rate cuts nor bloated stimulus packages since the beginning of 2020. Government debt has fallen, inflation is negligible, and stock valuations, particularly in the tech and real estate sectors, have come down significantly.

support measures expected

The cuts in several key lending and mortgage rates in January show that the Chinese central bank is now poised to support economic growth. “I think China will continue to use this monetary policy tool and also launch targeted infrastructure measures, for example in the area of ​​renewable energy and electricity grids,” said Rob Brewis, emerging market fund manager at Aubrey Capital Management. “However, the government’s declared goal is above all to increase the disposable income of citizens, especially the middle class. Consumption is therefore the most important driver of growth in the economy.”

So, by regulating education, healthcare and real estate, China is giving people more money to spend. Money that flows, for example, into electric cars, cosmetics or old-age provision. “In the case of mutual funds alone, sales increased by 35 percent last year,” says Brewis. He therefore considers listed asset managers to be attractive investments, and the area of ​​electromobility is also still interesting.

Bin Shi, the manager of UBS China Opportunity, who is also included in the offensive model portfolio, finds the healthcare sector particularly interesting. The aging population, increasing prosperity and government efforts to make healthcare services universally available speak for a positive development for pharmaceutical or telemedicine companies. The VanEck Vectors New China ESG ETF, for example, takes this development into account (see investor information). The portfolio manager also sees opportunities in the concrete gold segment. Because not all companies are as highly indebted as bankruptcy candidate Evergrande, but were taken into custody on the stock exchange.

It is more difficult to assess the Chinese tech sector with investor favorites Tencent, Alibaba & Co. They have lost billions in market capitalization as a result of regulatory measures from Beijing. The path to US stock exchanges has become significantly more difficult, and the requirements with regard to data protection and cyber security have become much stricter. But many economists do not expect any further tightening. “I’d be surprised if a new regulation campaign came out later this year,” says Christopher Smart, Barings chief strategist. “However, you also have to recognize that the tech sector has come under the scrutiny of authorities around the world and that this generally poses a certain risk for investors in these companies going forward.” Investors therefore need strong nerves for the Internet giants, most of which are listed on the Hong Kong stock exchange.

UBS fund manager Bin Shi believes that the Chinese tech giants will continue to grow in their core business, but that there will be more room for competitors elsewhere. Of course, this opens up new opportunities that the Robeco Next Digital Billion fund, for example, wants to use (see investor information). The portfolio here includes companies that meet the needs of the next billion Internet users. These come not only from China, but also from other emerging countries.

Opening perspective through mRNA

Hardly any investment professional dares to predict how China could maneuver itself out of the omicron lockdown problem. Some expect less draconian and more targeted containment measures. Hardly anyone believes that the borders will open again soon. After all, China’s first own mRNA vaccines could soon be approved after Beijing does not allow the vaccines from Biontech and Moderna into the country. This could improve the vaccination protection of the population, which has not been particularly good so far, and offer the prospect of opening – but probably not in the next few months. The corona risk remains with investors for the time being – even beyond the Olympics.

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Image sources: pixfly / Shutterstock.com, Aleksey Klints / Shutterstock.com