In addition to Alibaba, what other Chinese assets are foreign investors optimistic about?

"China has ample monetary and fiscal policy space and is more attractive than the U.S. or Europe."

Article | Barron's contributor Reshma Kapadia

Edit the | Guo Liqun

Chinese stocks are poised to continue their gains in the upcoming Lunar Year of the Rabbit. On January 8, China officially implemented the "Class B and B tube" for the new coronavirus infection, making reviving economic growth a policy priority, laying the foundation for Chinese stocks to recover the lost ground of the past two years.

As the focus shifts to economic growth, positive signals from the internet sector and real estate are another catalyst for Chinese equities. Economists expect the Chinese government to roll out more stimulus and take steps to boost job growth, further boosting business and investor confidence.

These stimulus measures are expected to create a virtuous circle of wage growth, boost consumer confidence, and possibly lead to a spending boom, including home purchases, which will spur domestic economic growth.

Jason Hsu, founder of Rayliant Global Advisors, an internationally renowned fundamental quantitative investment firm, said: "As long as there is good news, the good news itself can drive China's stock market to outperform. 2023 will be a difficult year for all countries, and as a major exporter, China will also be affected, but China has ample monetary and fiscal policy space and is more attractive than the United States or Europe. ”

Chinese stocks have risen sharply, especially in indices heavily attended by foreign investors. The largest Chinese ETF in the U.S. market, iShares MSCI China (MCHI), has gained 40% since the end of October 2022, and the Chinese concept ETF Invesco Golden Dragon ETF (PGJ) is up 74% over the same period.

Fund managers believe that Chinese stocks will rise further in the future.

Basak Yavuz, co-head of emerging market equities at Goldman Sachs Asset Management, said: "We look at high-quality companies with excellent management and good balance sheets. ”

Yavuz is bullish on consumer-oriented premium companies such as Budweiser Asia Pacific (1876.HK) and Kweichow Moutai (600519.SH), which are supported by increased foot traffic in restaurants and bars. Another company Yavuz is bullish on is Meituan (3690.HK), and while fewer people may order takeout than during the pandemic, Yavuz believes the reopening of the economy is expected to drive strong growth in Meituan's restaurant and hotel bookings.

Shares of some companies that have benefited from increased consumer spending have risen sharply, but Yavuz thinks companies like Ctrip (TCOM) will rise further. Ctrip is the top choice for domestic travel bookings, but 30% of its revenue also comes from outbound travel. Yavuz believes that Ctrip's outbound travel business is expected to rebound sharply after the lifting of outbound travel restrictions.

As China's economy recovers, many Chinese companies, including Yum China (YUMC), are expected to see stronger earnings growth. While Yum China has risen 50% since the end of October, shares in the world's largest restaurant operator are still 40% below their early 2021 highs, another attractive place for the company in addition to benefiting from economic reopening.

Leon Eidelman, co-manager of JPMorgan Emerging Market Equity (JFAMX), said: "Yum China is very rigorously managed, management has done a great job during the pandemic, and the company will get better and stronger. ”

Dan Chase, co-manager of Wasatch Emerging Markets Small Cap (WAEMX), is bullish on companies that are both long-term holders and benefit from economic reopening, such as factory automation company AirTAC (1590.TW), which is expected to get a boost as manufacturing activity recovers. Chase is also bullish on China's China Exempt (601888.SH), which has benefited from a pick-up in tourism.

Travel is one of the sectors where fund managers are expected to see a rapid rebound, with booking searches now rising significantly. Before the pandemic, Chinese tourists were the world's largest tourist group, and fund managers expect the number of Chinese citizens traveling abroad to resume growth as international travel restrictions are lifted.

Alexis Deladerriere, head of international developed markets equities at Goldman Sachs Asset Management, noted that in addition to Chinese companies, some foreign companies will also benefit from the increase in outbound travel. Disney (DIS) is one of them, and in addition to getting a boost from the reopening of parks in China, growth in outbound travel will also drive an increase in visitors to Disneyland parks elsewhere around the world.

Another company is InterContinental Hotels Group (IHG), which owns Holiday Inn, a brand popular in China. About one-fifth of IHG's hotel rooms are located in China, and one-third of new developments are also in China. De la De La Deirier pointed out that IHG will be boosted by the recovery of domestic travel in China, and IHG will also be boosted by outbound travel growth as Chinese tourists who travel abroad prefer to choose hotel brands that they are more familiar with.

As the number of Chinese tourists increases, sales of duty-free luxury goods and cosmetics will also increase. But De la De Reier pointed out that the French luxury goods company LVMH (MC) has benefited relatively little, because the company has achieved very good results in the past two years by launching its online business and expanding its scale in the Chinese market. In contrast, De la Derieer argues, retailers in China's neighborhood are likely to be the first destinations for Chinese tourists, including J Front Retailing (3086.Japan), which operates Japanese department store chain Daimaru.

As jobs pick up and the economy reopens further, companies related to advertising and e-commerce are also expected to get a boost, including internet giant Alibaba (BABA). For now, some of the factors that previously dampened the share prices of Chinese internet companies such as Alibaba, which has risen 65 percent since late October, have weakened. The delisting risk of Chinese concept stocks has been significantly reduced following the progress in Sino-US audit and regulatory cooperation, and the regulatory environment for China's Internet industry has also improved, as further demonstrated by Ant Financial's approval of capital increase. Alibaba has long been seen as a barometer of sentiment in China's internet industry, and the improvement in investor confidence is a boon for Alibaba.

Fusheng Li, research director at investment firm Causeway China, believes that although Alibaba has risen sharply in recent months, it is still 64% below 2020 levels, and there is room for further upside in the stock price, Alibaba has benefited from the consumer spending boom, and the company's market share will return to normal this year.

Li expects Alibaba to grow at least 10 percent and the operating margin of its core business to reach 60 percent, which is expected to improve further as the company cuts costs associated with some of its investments, in addition to buying back shares. Alibaba's price-to-earnings ratio is expected to rise to 18 to 19 times, down from 30 times in 2017 but still up from the current 11 times earnings forecast for 2023.

As China focuses on reviving consumption and the domestic economy, many fund managers are also looking for opportunities in China's A-share market, which is up 12 percent since late October. The main ETFs that invest in A-shares are iShares MSCI China A-Shares ETF (CNYA) and Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR).

On the other hand, consumer concerns and tackling debt for construction mean that China's economic recovery may not lead to a boom in commodities such as iron ore. However, the increase in Chinese tourists will push up oil demand, which could challenge some central banks' efforts to fight inflation.

Some fund managers are also concerned that as China reopens and the economy recovers, some will confuse short-term investment opportunities with long-term investment opportunities, as the country still faces a range of challenges, including a declining population, high debt levels and geopolitical risks.

JPMorgan's Edelman said: "Similar to the situation in the United States, the release of previously pent-up demand has led to a massive consumer boom. At some point, the spending boom may come down. "Edelman now sees more short-term upside potential for Chinese equities.

Chinese equities are expected to rebound sharply after major adjustments to pandemic containment measures, but it may take some time to regain all lost ground since the end of 2020.