Investors swarm into Chinese stock funds in a reopening wager, according to DJ | WSJ

In an effort to profit on the long-awaited reopening of the world's second-largest economy, international investors are pouring money into ETFs that follow Chinese stocks.

According to statistics from Refinitiv Lipper, investors have added more than $2 billion on a net basis to American mutual and exchange-traded funds that purchase Chinese stocks this year. This is a change from the second half of last year when they withdrawn roughly $1 billion and indicates five weeks in a row of inflows. Additionally, it correlates with a flight from stock funds with a U.S. focus.

Mainland Early in January, China fully reopened its borders after abandoning its zero-tolerance approach to Covid-19, which had essentially cut off Chinese customers from the rest of the globe. As investors aim to seize the reopening trade that drove U.S. equities in 2020 and 2021, share prices have already recovered and commodities have surged.

The MSCI China Index, which monitors Chinese firms listed in the United States, Hong Kong, and the mainland, has increased by around 45% from its October low but is still down by approximately 45% from the beginning of 2021. And a tradeable basket of industrial metals, including aluminium, copper, lead, zinc, tin, and nickel, just had its greatest month in more than ten years.

According to Jason Draho, head of asset allocation for the Americas at UBS Global Wealth Management, the growth story is more enticing in China and other areas of Asia than it is in the United States.

Beginning in 2023, U.S. equities and bonds have risen, but some investors worry that the market sentiment may be changing and that the Federal Reserve may keep hiking interest rates to cool a sweltering economy. While the Fed's tightening affects the economy, the rate of corporate earnings in the U.S. is anticipated to slow this year.

In contrast to flat or declining earnings this year in the U.S., Mr. Draho predicted that there would be significant earnings increase in China.

On early indications that Chinese consumers are starting to spend again at restaurants and bars and are once again travelling on the nation's subways, economists have raised their growth projections in recent weeks.

Fitch Ratings updated its prediction for China's economic growth in 2023 to 5% from 4.1% on Wednesday, citing signs that consumption and activities are rebounding more quickly than anticipated. The impact of China's reopening was one of the reasons the International Monetary Fund recently increased its projection for world growth.

When China's economy was strained by severe economic controls and concerns about regulatory pressure impacted the nation's high-flying internet enterprises, valuations for many Chinese companies fell to bargain-bin prices. After the spectacular rise that started last fall, some investors claim Chinese equities are no longer a screaming buy, but they highlight the possibility of earnings growth and the recent decline in the value of the US dollar as selling grounds.

According to FactSet, the Hong Kong Hang Seng Index trades at 10.1 times profits, while the Chinese online behemoth Alibaba Group Holding Ltd. is selling at 12.4 times its anticipated earnings over the next 12 months. The S&P 500's multiple is 18.2, in contrast.

Additionally, it looks that regulatory pressure on Alibaba, Tencent Holdings Ltd., and other significant tech businesses is lessening. The risk of widespread delistings from American stock exchanges has decreased since the U.S. audit authority said in December that it had for the first time obtained full access to the audit documents of Chinese businesses that are listed there.

Tencent's and Alibaba's American depositary receipts in New York have both increased this year by 16% and 19%, respectively.

David Bianco, chief investment officer for the Americas at the $900 billion asset manager DWS Group, claimed that he recently increased his exposure to Chinese stocks due to their lower values when compared to their American counterparts.

Will the golden goose lay its eggs so that the value of these stocks rise if the Chinese government gives them some time to do what they want? Concerning Chinese tech equities, Mr. Bianco enquired.

Shares of luxury goods businesses like LVMH Moet Hennessy Louis Vuitton SE and gaming companies like MGM Resorts International are among the international stocks benefiting from China's reopening. The number of multinational corporations with large operations in China, like Volkswagen AG and Apple Inc., has increased as well.

Due to the fact that China is the world's greatest user of raw materials, the reopening has also sparked a furious spike in raw material prices. Since 2003, the first month of the year for American copper futures has been the best. So far this year, aluminium prices in London have increased by around 1.5%. Tin has increased 11%, and zinc has increased 4.2%.

These metals are essential for producing the wind turbines, solar panels, and batteries required for the move away from fossil fuels and are used to produce goods like aeroplanes and electrical cables.

Their gains are the result of wagers that China will record modest growth even in the event of a projected slowdown in the U.S. economy, which will keep prices up.

Despite a strong growth narrative, some American investors are hesitant to invest due to political dangers.

The chief investment officer of Laffer Tengler Investments, Nancy Tengler, said: "There are opportunities, for sure, but I think those are trades, not investments.