Equities exposed to China are seeing the best gains so far this month
Stocks in Saxo’s China Consumer and Technology basket have recorded the strongest performance this month, across the entire Saxo Equity themes we track. It’s because five major cities in China (including Shanghai, Hangzhou Beijing, Shenzhen and Guangzhou) relaxed some covid restrictions, also, China said it would relax mass testing and quarantine requirements, and dangled the carrot to potentially ease restrictions further.
Given the world’s second biggest economy wants to lead global growth next year, there is a lot of catching up to do, and both whispers and expectations China will ramp up pro-growth fiscal support including to property developers and home buyers. Meanwhile, given China will likely encourage domestic consumption ahead of Lunar New Year holidays and the Spring festival (on January 21).
So as equity valuations are forward looking; we’ve seen investors and traders increase their exposure to Chinese facing equites (from the end of October 2022); hoping consumer and business spending improves, from pent up demand and policy support.
In Saxo’s China Consumer and Technology basket you can see Alibaba has done well. Its shares have rallied 25% month on month on expectations pent up demand will likely flow to its balance sheet, as 70% of its income is from online-China sales. Alibaba is also based in Hangzhou, one of the cities easing restrictions. Although Alibaba shares are down 70% from their high, the market expects 2023 profit margins to be the same as 2022. So, that could cap long term share price growth.
Another stocks in Saxo’s China and Consumer Tech basket, is fashion giant JD.com. Its shares are up 15% month-on-month on hopes that retail spending will rise, particularly in China. 90% of its revenue is from retail. And market consensus suggests profit margins will improve in 2023, with revenue to rise 15%, while consensus forecast expenditure to drop, and free cash flow to rise about 30%. So that seems really supportive (if it comes to fruition). However, the jury is out on its profit growth, expecting growth to be the same in 2023 as 2022.
Separately keep energy stocks on your radar, which could see an increase in demand amid the cold snap headed for Asia
Weather forecasts suggest Asia is set for a harsh winter, so demand for energy commodities; such as coal and gas will likely pick up, while their prices are elevated. Some Asian countries are dependent on coal for electricity - 70% of China and India's energy needs are met by coal, 60% of Australia's energy comes from coal, ~25% of Japan's energy comes from coal. And as such, this is why coal demand usually peaks in January; in line with electricity demands. If you have ever been to China in January you may remember the air being thick with smog.
We also need to consider, the Newcastle coal price, for exported Australian coal is back at record all time highs; meaning power prices in Asia are likely to bite. But consider, China still has an import ban on Australian coal. So potentially consider looking at companies who sell coal to other countries - who are somewhat dependent on it to get through this winter.
It may be worth looking at New Hope Corporation who sells 50% of its coal to Japan, and over 10% to Taiwan. Whitehaven Coal sells the majority of its coal to Japan, and 15% to Taiwan. While Coronado Global sell 40% of its coal to the United States. Also consider in 2022, these companies saw triple digit earnings growth which has boosted their shares 80-200%.
We know past performance is not an indication of future performance, but these are some stocks to keep an eye on.
To find Saxo’s China Consumer and Technology basket or information about the stocks mentioned, head the Inspiration page after you’ve logged in, then click on stocks.
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