Chinese President Xi Jinping walks past officials wearing face masks after the outbreak of coronavirus disease (COVID-19) when he arrives for the closing session of the National People’s Congress (NPC) in the Great Hall of the People in Beijing , China, May 28, 2020..
Carlos García Rawlins | Reuters
China has been juggling a global pandemic alongside geopolitical tensions this year, clouding prospects for those who want to invest in the world’s second-largest economy.
The country is trying to recover after it essentially shut down its economy to contain the coronavirus. The virus is also a key part of the tensions between the United States and China, after Washington accused Beijing of hiding the full scope and origins of the outbreak.
Tensions between the two have spread on many fronts, including financial markets after the Senate passed a bill targeting Chinese companies listed in the US. USA will revoke the special business status of the Asian financial center.
Despite these developments, there are still areas of the market where investors can find opportunities. This is how investors should trade Chinese stocks amid these tensions, according to analysts.
Focus on Chinese A-shares
Investment bank Morgan Stanley recommends being overweight Chinese A-shares, or stocks traded on continental indices. Valuations within those shares have tended to drop less in response to tensions between the United States and China, the investment bank said.
“The A-share market also has very limited foreign-owned representation,” said Morgan Stanley. That’s only about 4% of the market capitalization for A-share stocks, compared to at least 35% for the MSCI China index, he said.
MSCI China has A shares in the index, but it also includes H shares, which are traded on the Hong Kong stock exchange, as well as Chinese companies listed in the US. USA
Be selective when choosing Chinese companies listed in the US. USA
The Senate bill passed last month could essentially ban many Chinese companies from listing on US exchanges.
It would require companies to certify that they are not owned or controlled by a foreign government and that they are subject to audits by US regulators for three consecutive years. Businesses would be prohibited from exchanging if they do not meet any of the requirements.
Morgan Stanley warned investors about companies with high foreign ownership but not eligible for secondary listing in Hong Kong.
“They face increased uncertainty regarding delisting as a result of the continued focus on … accounting / auditing compliance,” he wrote in a report last week.
Hong Kong has made it more attractive for companies listed elsewhere to have a secondary listing on their stock exchange. But there are certain criteria: For example, technology and innovation companies that are listed for at least two years on the New York Stock Exchange or Nasdaq qualify.
Analysts have predicted that the risk of being removed from the list in the US. USA It will lead many Chinese companies to flock to Hong Kong.
That will be positive for Hong Kong Exchanges and Clearing stocks, analysts at Citi Research said in a report last week. That could lead to a 10% increase in earnings, analysts said in their note reiterating a “buy” rating.
Increase exposure to consumer stocks.
China’s economy was one of the first to reopen, lifting most restrictions and allowing residents to resume activities outside their homes. That normalization of social activities “remains on track,” said Morgan Stanley.
The bank raised its rating for durable consumer stocks to “equal weight,” an indication that it expects those stocks to perform in line with their peers. The investment bank explained that it expects less downward pressure on earnings for consumer and service related industries.