The recent relaxation of China’s strict Covid-19 measures has provided a welcome boost to sentiment and looks set to buttress the healthcare, consumer discretionary, tourism, manufacturing and auto industries, according to market observers.
After the outbreak of Covid-19 during the first quarter of 2020, China embarked upon one of the most stringent responses globally, including infamously a months-long citywide lockdown in Shanghai.
However, the situation changed dramatically when large crowds took to the streets recently in major cities such as Beijing and Shanghai demanding a reversal of some of the Covid-19 restrictions.
In December, the Chinese authorities announced 10 new measures to “further optimise” the country’s approach to Covid-19, which included a relaxation to lockdown and testing measures.
In the short term, Indosuez Wealth Management believes the 10 new measure have boosted market sentiment as indicated by soaring share prices and a surge in transaction volumes after the new policies were announced.
Yet, it believes investors’ long-term appetite has remained largely unchanged.
“For those who have been sceptical, they will not commit any long-term capital to the market yet. As for those who are more positive on China, they have been very active over the last few weeks ‘to test the water’ and are now attempting to take profit,” said Stanley Chan and Josephine Tom at Indosuez Product Advisors.
“To some extent, fund managers, with long-term funds, also follow a similar mindset with some being more optimistic while others continue to be bearish.”
Asset managers, on the other hand, were more positive on the policy.
“It looks like the 10 new measures will act to boost market confidence around China’s reopening over the coming quarters,” said Nicolas Wang, senior equity adviser at Union Bancaire Privee.
Yet, Wang believes more clarity is needed for some of the latest policies such as allowing people to quarantine at home, accelerating vaccinations for the elderly and making PCR tests no longer mandatory except in special circumstances.
Sectors standing to benefit
As the country gradually reopens, market observers also identified a number of sectors that are likely to benefit.
They are cyclical sectors such as healthcare and consumer discretionary, the tourism industry such as airlines, gaming and hotels, and the manufacturing and auto industries.
Travel and tourism-related sectors are expected to be among the first to reap the benefits.
“As the number of passengers recovers significantly, there will be a large rebound in demand for airlines, travel agencies, hospitality, tourism and hotels,” said Wang from UBP.
He also believes the demand for consumer discretionary goods such as sportswear and cosmetics is set to increase rapidly, especially in offline channels.
For the healthcare sector, the unmet medical needs suppressed by lockdown measures will start to be addressed after the relaxation. Demand for innovative pharmaceutical products will rise, Wang added.
Apart from the change in approach to tackling Covid-19, Indosuez also noted that the Chinese authorities have launched fiscal and monetary stimuli such as the property easing measures, with the goal of turning around the economy next year.
“We believe these cohesive efforts and measures will benefit those high beta cyclical stocks or sectors more in the near term. The longer-term effect will really depend on the execution and the consistency and commitment to the implementation and policy direction among other external geopolitical risks and macro factors,” said Chan and Tom.
Over the long term, green energy and battery-powered vehicles will be beneficiaries as China’s economy regains its growth momentum.
On the other hand, less cyclical sectors as well as the PCR testing business are less likely to benefit, they said.
Although it may take some time for investors to regain confidence in the world’s second largest economy, the reopening of China has more or less shifted the way investors see the market in both the short and long term.
It has also put investors under pressure to catch up and rebalance their portfolios, said Indosuez.
As market volatility is expected to continue, Indosuez remains neutral on China over the long term and recommends clients to set aside funds for long-term investment in the market.
