China's CSI300 Index and the Shanghai Composite Index have gained over 2% in shortened trading as markets responded positively to Beijing's decision to lift lockdowns and travel quarantines. More than 30 mutual funds, mostly focused on equities, launched this week, offering investment opportunities in the recovery. Last month, sector-specific exchange-traded funds saw net inflows of over 2.5 billion yuan ($364 million) as investors sought exposure to tech, new energy, and defense sectors.
Hong Kong's Hang Seng saw a jump of up to 8% to six-month highs this week. However, with tourism, hotel, and catering shares gaining over 20% since November and mainland China developers' stocks almost doubling since the end of October, some believe the market needs to be more saturated. CEO of MegaTrust Investment (HK), Qi Wang, warns that the road ahead may be bumpy and advises caution, particularly in the crowded trade of travel and leisure stocks. Li Xiaohua of Harford Fund Management Co also recently increased exposure to tourism stocks but now believes the market is entering a new phase and will pay closer attention to companies' fundamentals.
Economic Growth Expectations
Despite surging infections and reports of strain on health systems and crematoriums, investors remain optimistic about an eventual recovery. Liu Guoliang, fund manager at Tianhong Asset Management, expects many places in China to experience peak infections before the Chinese New Year festival in late January. Yang Delong, the chief economist at First Seafront Fund Management, predicts China's economic growth will exceed 5% this year as COVID restrictions are lifted, compared to consensus expectations of around 3% growth in 2022.
However, as prices firm along with hopes, it also means fewer opportunities in certain sectors amid a fragile global outlook. Cao Ludi, fund manager at Fullgoal Fund Management, predicts an "N-shaped" economic recovery, with an expected spring revival in activity likely to be followed by a harsh reality check in the second quarter. Ludi advises against chasing high-flying real estate and tourism stocks as their "fundamentals remain a question mark."
Risks in the Property Sector
The property sector, which accounted for a quarter of the Chinese economy and was heavily impacted last year as developers struggled to finish apartment construction, carries significant risks. Economists expect price falls to moderate this year due to promised support from authorities, but declines are still predicted. Despite these risks, the shift in the market is drawing back foreign investors who had largely been reducing exposure to sectors connected to China's consumer market. Christopher Wood, global head of equities strategy at Jefferies, suggests betting on the reopening trade with internet stocks as "investors should bet on the reopening trade with the obvious liquid consumption proxies the internet stocks."
