Chinese President Xi Jinping walks past officials wearing masks following the coronavirus disease epidemic (COVID-19) as he arrives for the closing session of the National People’s Congress (NPC) at the Grand Palace People’s Hall in Beijing, China on May 28, 2020.
Carlos Garcia Rawlins | Reuters
China has juggled a global pandemic and geopolitical tensions this year, clouding the prospects for those wishing to invest in the world’s second largest economy.
The country is trying to get back on its feet after essentially shutting down its economy to contain the coronavirus. The virus is also a key component of tensions between the United States and China, after Washington accused Beijing of hiding the full extent and origins of the epidemic.
Tensions between the two spread on many fronts, including the financial markets after the Senate passed a bill targeting Chinese companies listed in the United States. the special commercial status of the Asian financial center.
Despite these developments, there are still sectors of the market where investors can find opportunities. Here’s how investors should trade Chinese stocks amid these tensions, analysts said.
Focus on Chinese A shares
Investment bank Morgan Stanley recommends being overweight Chinese A stocks or stocks that trade on mainland indices. Valuations within these stocks have tended to decrease the least in response to US-China tensions said the investment bank.
“The A-share market also has a very limited representation of foreign ownership,” said Morgan Stanley. This represents only about 4% of the A-share market capitalization, compared to at least 35% for the MSCI China index, according to the report.
MSCI China has A shares in the index, but also includes H shares which are traded on the Hong Kong stock exchange as well as Chinese companies listed in the United States.
Be selective in the selection of Chinese companies listed in the United States
The Senate bill passed last month could essentially ban many Chinese companies from being listed on American stock exchanges.
This would require companies to certify that they are not owned or controlled by a foreign government and to subject them to audits by US regulatory authorities for three consecutive years. Companies would be banned from the stock exchanges if they did not meet any of these conditions.
Morgan Stanley has warned investors against companies with large foreign participation but which are not eligible for secondary listings in Hong Kong.
“They face greater uncertainty regarding de-listing due to 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 its stock exchange. But there are certain criteria: for example, technology and innovation companies listed for at least two years on the New York Stock Exchange or on Nasdaq are eligible.
Analysts have predicted that the risk of delisting in the United States will cause many Chinese companies to flock to Hong Kong.
This will be positive for Hong Kong Exchanges and Clearing stocks, analysts at Citi Research said in a report last week. This could lead to a 10% increase in profits, analysts said in a note reiterating a “buy” note.
Increase exposure to consumer stocks
The Chinese economy was one of the first to reopen, lifting most of the restrictions and allowing residents to resume activities outside their homes. This normalization of social activities “remains on track,” said Morgan Stanley.
The bank has raised its rating for “equally weighted” consumer durables stocks, indicating that it expects these stocks to behave like its counterparts. The investment bank said it expects less downward pressure on profits in the consumer and service industries.
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