China's reopening brings joy – and woe – for markets
THE rapid reopening of China’s economy from Covid-19 lockdowns has brightened the outlook for global investors, who are keen to leave behind one of their worst years on record. But it may also fuel the inflationary pressures that policymakers hope are abating.
Financial markets were hit by double-digit losses in 2022 as inflation and interest rates jumped. The reopening of the world’s second-largest economy will have a critical impact as they seek to recover.
No doubt, it will be a bumpy ride. Covid cases, deaths, and the economic effect of rampant infections in China have yet to play out. Commodity prices have already risen, adding to inflationary risks.
For now, investors are focused on the positives. They anticipate more stimulus measures by Beijing; they are also predicting that the health crisis and economic hit to China will peak in the first quarter of 2023.
Edward Al Hussainy, senior interest rate and currency analyst at Columbia Threadneedle, said: “The reopening story is looking quite good... there is a lot of credit and fiscal stimulus that China is putting into the system.”
“That stimulus is finding its way into global asset prices.”
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China’s reopening is also taking the sting out of recession risks. Goldman Sachs said it expected the eurozone economy to grow 0.6 per cent this year, reversing a previous contraction forecast.
AXA Investment Managers chief investment officer for core investments Chris Iggo said Chinese demand “will offset that story in the West”, that consumer demand and business spending have slowed with rising interest rates.
Emerging markets, seen benefiting from tourism and trade links to China, were at the top of investors’ buy lists.
Europe’s leading asset manager Amundi said the reopening could herald a “turning point” for emerging market equities. The trade was also favoured by the investment institute at BlackRock, the world’s largest asset manager.
Goldman Sachs said company earnings in Malaysia, Singapore and Thailand should get a boost from the reopening.
A favourite for Columbia Threadneedle’s Hussainy and other investors was the baht, which has rallied to its highest level since March 2022. The Thai currency is up some 5 per cent from the start of December 2022.
Chinese tourists are critical to the South-east Asian country’s economy. Pre-pandemic, they accounted for a quarter of annual visitors to Thailand.
Another investor favourite was Chile, a leading copper producer. Its peso rose 7 per cent from early December 2022, as copper prices jumped to hit US$9,000 this week for the first time since June 2022. BlueBay Asset Management fund manager Zhenbo Hou said the commodity-driven Australian dollar could rise further as well.
Tourism and leisure stocks were also expected to benefit from the reopening. China was the world’s largest outbound tourism market before the pandemic.
Alison Shimada, head of total emerging markets at Allspring Global Investments, said Chinese consumers would “run to Beijing International Capital Airport and go out of the country as fast as they can, because they want to travel”.
UBS said travel could also benefit European luxury stocks, where Chinese consumption dwindled to 17 per cent of sector sales after the pandemic started. In 2019, Chinese consumers accounted for 33 per cent.
This week, shares of luxury conglomerate LVMH hit a record high.
While the boost to world growth from China’s reopening was expected to hurt the safe-haven US dollar, the euro was forecast to benefit. China is the European Union’s leading trading partner, accounting for about 16 per cent of all goods traded.
Barclays said the East Asian power’s slowdown was responsible for more than half the euro’s drop against the US dollar in 2022. The reopening would support the outperformance of European stocks, and challenge the consensus underweight positioning, the bank’s analysts added. UBS also favoured European materials, industrials and consumer discretionary stocks.
But a bump from China’s reopening raises some concerns about inflation.
Oil prices have risen 10 per cent from mid-December 2022, to almost US$84. China is the world’s leading importer of oil and many other commodities.
AXA’s Iggo said: “One thing that we need to be sensitive to is whether the recovery in China adds to global inflationary pressures.” He added that the reopening could prompt the European Central Bank to raise rates for longer, since eurozone inflation is largely energy driven.
The hope is that the economic slowdown outside China will offset its rising demand for commodities, dampening the inflationary impact.
Goldman Sachs estimated that a return to normal travel and transportation behaviour in China could boost oil consumption by 1.5 million to 2 million barrels per day. But slower growth globally means that oil prices will not touch last year’s peak near US$140.
“The rise in rates is really starting to have the desired impact on inflation at this point in time,” said Jason Pride, chief investment officer of private wealth at Glenmede. He added that the effects would “play through the course of the year, even with China reopening”. REUTERS
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