When Jun Bei Liu presented at the Hearts & Minds investment conference in Hobart in November, China was just waking up from its zero-COVID lockdown.

On the mind of the viewers were the far-reaching implications of the measures announced by the Chinese government to relax COVID controls and support a cratering property sector.

As they say, the rest is history. These initial proposals were followed up by a more forceful set of statements and policy supports after the politburo meeting and Central Economic Work Conference.

The result was that China came out of its zero-COVID state much faster than expected as it pushed for herd immunity rather than flattening the curve, with the obvious impact to boost the economic outlook much faster than expected.

Fast-forward more than four months and we are already hearing the China reopening trade has fatigue. We don’t agree, nor think that many stocks exposed to the reopening theme are not short-term cyclical winners that should be sold and moved on from.

Instead, we think this theme has legs and will continue to surprise the doubters as reopening tailwinds remain in place for some time. It’s not unbridled optimism to think this will last for at least the next year, particularly if the experience of almost every other country to come out of lockdown is the blueprint.

At a time when Australian investors face elevated domestic cyclical risks, and when most other developed economies are either entering a recession or on the cusp of recession, we like looking for investment opportunities from the world’s second-largest economy but also one that is completely de-synchronised with the momentum of global growth and inflation.

In fact, the more bullish one becomes on China’s reopening trade, the more bearish one should be on how it may exacerbate global inflation and growth headwinds for the rest of the world, due to stronger commodity and energy demand and the release of the Chinese tourist and consumer.

Three ways to benefit

We think there are three ways to continue playing the reopening theme. First, through areas that are exposed to rising Chinese domestic demand. The Chinese consumer is likely to drive a significant boost to domestic demand for goods, but increasingly services. This also holds true for its trading partners in Asia and further afield.

Second, the return of Chinese tourists will release a wave of demand for foreign services that international travellers (and, in Australia’s case, students) demand. And third, through commodity demand as industrial activity picks up from its deep slump.

We know there’s an argument that China’s recovery will not be “industrial-heavy” as the focus sits on the consumer rather than the property and infrastructure sectors. But this will not preclude some normalisation in demand for energy (oil in particular) and other commodities (that can also support decarbonisation) even if the upside is not as large as prior periods where the government has leant on construction growth levers.

We like the idea of playing further momentum in these areas, while recognising the tailwinds will be different. Commodities are driven by global demand which, ex-China, is under pressure. But that statement conveniently forgets that China is still the world’s largest user of nickel, iron ore, aluminium and copper, to name just a few. Regardless of rest-of-world concerns, we suspect upgrade earnings risks remain from stocks most exposed to these areas.

Our preference for gaining exposure to the reopening thematic is via Chinese consumers – and through education and travel. They will continue to ramp up consumption in areas of discretionary spending such as branded (luxury) apparel, footwear, wine, and technology. This means Treasury Wines – which can benefit from thawing relations between China and Australia – A2 Milk, and the domestic educational sector (IDP Education) as Chinese students return.

Finally, those who are leveraged into the wider re-opening sphere, such as WiseTech and Cochlear, with a large share of Asian sales, stand to benefit from the tailwinds as Chinese economic momentum normalises.

We urge investors not to give up too early on the reopening theme. China is not anywhere near back to normal activity levels; this will take time.

It might be bumpy and there will be periods where doubts creep in on the sustainability of momentum. But when so many headwinds apply to the domestic backdrop, we think it makes sense to continue favouring areas with strong and identifiable tailwinds.

This article was originally posted by The Australian Financial Review here.

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