Wednesday, February 8, 2023
HomeMarketLooking to Play China's Covid Exit? Try Europe and Latin America.

Looking to Play China’s Covid Exit? Try Europe and Latin America.

China on Wednesday announced a major shift in its zero-Covid policy.

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Kevin Frayer/Getty Images

For those wary of getting into Chinese stocks after their recent big runup, Latin America and Europe offer a backdoor into an eventual recovery in China’s economy.

Chinese authorities now are speeding up plans to transition away from the harsh Covid restrictions that have strangled the economy and fueled frustration. The
iShares MSCI China
exchange-traded fund (MCHI) has gained 20% over the past month in anticipation of an exit from zero-Covid policies.

BCA Chief Emerging Markets Strategist Arthur Budaghyan is bracing for bumpiness after the sharp rally in Chinese stocks as China’s economy continues to struggle, and as the exports that have been supporting it begin to decline. BCA expects mainland China exports to shrink in double digits in early 2023 as global trade and manufacturing activity slows, according to a BCA client note.

Chinese authorities overnight took more steps to ease restrictions, responding to frustration that erupted in protests earlier in the month. For example, asymptomatic and mild cases could stay at home to quarantine instead of being shipped to centralized facilities.

The concern now is the possible public-health complications in the next couple months as authorities try to increase vaccinations and ease restrictions to keep from overwhelming its hospital system.

With Chinese authorities rushing to put a floor under their economy by helping its ailing property market, economists are looking for an eventual recovery, possibly in the second and third quarter. That could support demand for commodities and some sort of reopening-related spending after Chinese consumers have been cooped up for years.

JPMorgan
strategists in a recent note said they expected China’s GDP to rise to 4% next year, up from about 2.9% this year. Increased commodities demand from China helps Latin America, which already has a positive setup because countries like Brazil could start moving toward more accommodative monetary policy since they began hiking rates well before the Federal Reserve. Also helping Latin America: Its market is still relatively cheap after years of being ignored, and it benefits from countries, including the U.S., that are looking to diversify away from China—both for manufacturing and critical minerals.

Latin America is home to roughly two-thirds of the world’s global lithium reserves. Chile, Peru and Mexico hold an estimated 40% of global copper reserves and Brazil is home to 17% of global nickel reserves—all commodities needed for the global energy transition, according to a report from the Brookings Institution. The
iShares Latin America 40
ETF (ILF) is up 11.6%, and it offers broad exposure to the region.

Another way to tap into China’s Covid exit is through European stocks that are closely tied to Chinese economic indicators like the China
PMI
Import index or that get a sizable chunk of sales from China—or both, according to a video briefing to clients by
UBS
strategist Nicolas Le Roux.

UBS screened stocks that fit this profile and found that materials companies ranked high on both fronts. Consumer discretionary companies had the highest percentage of sales coming from China at 14%, and industrial stocks’ returns had the highest correlation to China PMI import index.

High on the screen were luxury companies like
Kering
(KER.France) and
LVMH Moët Hennessy Louis Vuitton
(MC.France). Industrials like
ABB
(
ABB
) and
Bucher Industries
(BUCN.Switzerland) made the list, as well as chemical companies
Sika
(SIKA.Switzerland) and miners like
SSAB
(
SSAB.
A.Sweden)and
voestalpine
(VOE.Austria).

Write to Reshma Kapadia at reshma.kapadia@barrons.com

Credit: marketwatch.com

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