TWO stories look set to dominate global stock markets this year. The first relates to whether the US can avoid a recession under the weight of higher interest rates. The second is how much a reopening of China’s economy will boost global demand. An ending of the war in Ukraine could be a third but, as yet, we unfortunately can’t count on that.
Three years of zero-Covid policies have undoubtedly depressed business and consumer demand within China’s borders. Growth in the world’s second largest economy sank to just 3% last year, compared with 8.4% in 20211.
It makes sense therefore that a return to more normal consumption in 2023 will lift growth and have knock-on effects for economies and stock markets generally. If patterns in the west since 2021 are anything to go by, the release of pent-up consumer demand could be very significant.
A key development this Chinese New Year was a sharp increase in the demand for gasoline. According to Sinopec – now the world’s largest supplier of oil and petrochemical products – China’s retail gasoline sales were 20% higher this year than over the same holiday period in 20211.
China imports much of the energy and hard commodities it needs to sustain itself – for example, coal from Indonesia and Australia; iron ore from Brazil and South Africa; oil from Saudi Arabia and Russia.
It also buys a good deal of finished products from the west, including branded and luxury goods from Europe and America, to the extent that some global manufacturers now think of China as their “home market”.
Meanwhile, a number of countries elsewhere in Asia, are positioned to benefit from a resurgence in outbound Chinese tourism. Malaysia and Thailand are reportedly among the countries already gearing up for an influx of Chinese visitors this year2.
The upshot for investors is that it’s quite possible to gain a substantial exposure to China’s reopening without investing in China directly. This may appeal particularly to investors wishing to stick with more familiar stock market names or markets operating under western-style regulation.
Global emerging markets funds are an obvious place to look for beneficiaries of a Chinese recovery, not only because they may have exposures to exporters of vital commodities but also because they may contain shares in producers of outsourced Chinese goods and recipients of Chinese travellers.
European equity funds often have a significant indirect exposure to China too, by virtue of their investments in global exporters. Luxury goods makers that ship substantial volumes to China are often regular fixtures – for example, Hermes and LVMH, both with an estimated 30% exposure to China by revenue3.
Fidelity’s Select 50 features seven funds that are focused on Asia and emerging markets which offer ways for investors to gain an exposure to China through the wider region. It also contains three European funds, including the Comgest Growth Europe ex UK Fund, which currently has a top-10 holding in LVMH.
Watch Tom Stevenson’s latest investment outlooks for Asia and Emerging Markets and Europe.
Source:
1 National Bureau of Statistics, 18.01.23
2 aastocks.com, 30.01.23
3 Reuters News, 07.01.23
