China’s reopening has reawakened wider interest in foreign investment, and strategists expect it to offer rewards to investors in its own markets and beyond this year. Strategists see China’s markets easily making double-digit gains this year. Hong Kong’s Hang Seng index is up just under 10% year-to-date, while mainland markets such as Shanghai are up more than half that. But strategists have also warned that the story of China may not end up being all that is hoped for due to the continued spread of Covid and the difficulties of reactivating the economy with the globe. “My view remains that China is a trade, rather than an investment,” said Jimmy Chang, chief investment officer for the Global Rockefeller Family Office. “It’s not surprising that more people are warming to China, given that there is concern about a potential recession here in the U.S. People want to find positive catalysts around the globe.” The case for investing outside the United States is strong, especially with the dollar coming from its highs and looking at more downsides. The iShares MSCI Emerging Markets ETF, which includes Chinese companies, is up 8.5% year-to-date, while the S&P 500 is down just under 2% through early 2023. .SPX EEM 3M line us v eem “On a 12 – Month forward, international markets are currently trading at a valuation discount of 29% to their US counterpart – the widest level in more than 15 years,” said Ben Kirby, co-head of investments at Thornburg Asset Management. “For long-term investors, we recommend taking advantage of currently economic valuations and diversifying portfolios outside of the US” China, US relations heat up The sudden turn in China’s zero-Covid policy since the end of last year it has sent ripples through world markets. Strategists expect business opportunities to improve and spread in countries such as Germany, Japan and some emerging markets. The major policy shift comes even as China’s leadership shows signs of warming to the U.S. For example, Chinese Vice Premier Liu spoke at the World Economic Forum in Davos this week and met separately with Secretary of the US Treasury, Janet Yellen. Another meeting was promised. Ed Mills, Washington policy strategist at Raymond James, said the goal of improving relations between the United States and China has been clear since the G-20 meeting in July. Secretary of State Antony Blinken will visit Beijing and meet with his counterpart Chinese Foreign Minister Qin Gang on February 5 and 6. he said. Mills said Chinese President Xi Jinping and President Joe Biden could meet in the fourth quarter. Beyond trade, relations between China and the United States were particularly strained since former Speaker of the House Nancy Pelosi visited Taiwan in August. China had warned him not to visit. There were also new bans on Taiwanese goods and military exercises were held near Taiwan. China has said Taiwan is part of greater China, and the United States has repeatedly warned it against annexing the country. “Some of the tensions have cooled. The question is: will you get more relief from here or will it heat up again,” Mills said. “I don’t think we have an answer to that yet.” China’s Ministry of Commerce said Liu and Yellen discussed US economic and technology policy. Last fall, the United States put curbs on American companies and individuals working with Chinese partners in high-end semiconductors. This action came after the Trump administration placed specific restrictions on SMIC and Huawei. In addition, the Trump administration’s tariffs on many Chinese goods are still standing. The reopening is a turning point China’s re-emergence after the blockades could stimulate more business and economic activity around the globe. It will also create more demand in China. Strategists point to the prospect for other countries in the region that trade with China to benefit, including Korea and Australia. “While China’s reopening is undoubtedly a turning point, there are reasons to be cautious,” Barclays equity strategists wrote. “Zero-COVID was just one of a host of challenges facing China’s growth prospects in 2023, which still include a further contraction of the real estate market, slowing exports and restrictions on semiconductors from the States United. The reopening begins to clear the way for Chinese consumption to recover, but more than 60% of family wealth remains tied to a weakened housing market. But the prospects for China’s economy are much brighter than they were just a few months ago. After the strict macro and regulatory repression in 2021, the government is now stimulating the economy. Economists have increased their growth forecasts for the Chinese economy after the country ended the zero-Covid policy, with a Bloomberg consensus now at 5.1% for the growth of the gross domestic product in 2023. The economy grew at 2.9% year over year. fourth quarter MCHI 1Y line msci economy Citigroup said there were some upside surprises in the economy, including recent data on retail sales and the labor market. The earlier-than-expected reopening could mean a faster recovery, and they say their own forecast for annual growth of 5.3% in 2023 could end up being too low. Citigroup is overweight in China. “If it essentially has a significant rebound in profits at the start of a new cycle, we could easily see 20% gains in China this year,” said Steven Wieting, chief investment strategist and chief economist at Citi Private. Bank, referring to MSCI China. . The iShares MSCI China ETF is already up 12.4% year to date, but is off its highs from earlier this month. The KraneShares CSI China Internet ETF is up 12.6% for the year to date, while the iShares China Large-Cap ETF is up 12.2%. Chinese internet KWEB 1Y Wieting said that even as Covid spreads at a rapid clip in the country, he expects China to remain open and continue to move forward. “China cannot close again,” he said. He noted that the country faced internal pressure from citizens protesting the restrictions. “China has seen that the lockdowns create bigger problems for health and economic activity in the country than to allow the spread of what they believe is a less fatal version of the virus,” he said. “With high communicability, it’s not something you can easily bottle up.” Where to place bets Wieiting said American investors can invest in China through its biggest companies. Some of these are the main holdings of the iShares Emerging Markets ETF. For example, Tencent Holdings, Alibaba and Meituan are among its top five holdings. Earlier this week, Goldman Sachs said the best way to play catch-up in China is to bet on the Chinese consumer through e-commerce giant Alibaba. The stock is down 31% since the beginning of the year. BABA 1Y line baba Wieting said he has actively sought opportunities in global markets as a way to diversify outside the United States, but some investors are attracted to overseas opportunities such as the US market seems a bit performance. Another way to play China is through American companies doing business there. The CEO of Coca-Cola, James Quincey, for example, told CNBC this week that the end of the blockades is good for business. “What matters to our business is the mobility of consumers in the country. Obviously there is an increase in mobility so that will be good for us,” he said. “The trajectory of the reopening I’m sure will be very similar to the United States and Europe.” Equity strategists at Barclays said China’s reopening should have limited impact on the US market. While S&P’s international revenue exposure is 30%, they found that only 2% of that is direct exposure to China revenue. Among the companies Barclays identified with exposure to China include Las Vegas Sands, Starbucks, Western Digital, Borgwarner and Tesla. Paul Christopher, head of global market strategy at Wells Fargo Investment Institute, said he still prefers the U.S. but is looking at other markets. “What we like to say to conservative investors in particular is to look for multinationals that have exposure to China. If they operate here, the Chinese need them,” he said. Companies in areas such as pollution reduction and health care could be beneficiaries. In the longer term, financial firms may also benefit. “In the future, when they get closer to opening, American and European companies will be on the ground here,” he said. US technology companies, on the other hand, have been operating in China for a long time and face regulatory risk, including China’s monopoly laws. Companies like Apple, which has a large manufacturing footprint in China, have actively sought to move some operations away from China. “Warrior wolf to wolf in sheep’s clothing” “We immediately get these warm and fuzzy signals from China, but the thing to look at is that it does not really change the subject,” said Chang, the CIO of the Global Office of the Rockefeller family. “You have this transition from wolf warrior to wolf in sheep’s clothing, trying to play nice.” Chang said businesses and investors have been quick to embrace the change. “They want to go back to China, business as usual, thaw of intentions and improve relations,” he said. But, he said, investors should keep in mind the political aspect. “[House] Speaker [Kevin] McCarthy created a committee with the goal of dealing with the growing threat of China,” he said. “I don’t think Xi Jinping himself has changed his long-term agenda, his China dream, his long-term ambition. The Covid lockdown has been so damaging to the Chinese economy, they want to return to a growth path in 2023.” Well, Christopher of Fargo said that he has started to re-examine emerging markets. “We still prefer the United States and we will still be focused on a “If the world does not put itself on the brink of recession as we thought at the end of last year, then the primary benefit could be the cyclical oversold, as emerging markets.” he said. “It just doesn’t seem like it’s going to happen.”