Stocks exposed to China’s postpandemic reopening have understandably soared over the past six months, despite taking a back seat in April. There might be a buying opportunity for companies riding a recovery in the world’s second-largest economy, particularly those that still look inexpensive.
Six months ago, China began sending signals it was moving away from a zero-Covid policy, which had hindered economic growth. Since early November, the MSCI China index and a basket of “shadow China” companies—global players that get more than 10% of sales from China—have both rallied, notes Jefferies global head of microstrategy Desh Peramunetilleke.
Shadow China companies “in all the major sectors have outperformed their peers over the past six months,” he writes, despite the slowdown in April, a situation he expects will be temporary. These companies also tend to have protective moats, and have more potential for positive earnings revisions, “which should allow for further upside.”
That makes sense, given the surge that companies in the U.S. and elsewhere in the world experienced when they more broadly reopened after 2020s pandemic-related restrictions. As Barron’s previously noted, Macau casinos are seeing a resurgence in revenue, multinational corporations have reported “green shoots,” in the nation, and exports jumped amid factory reopenings.
All that comes as China’s economy rebounded faster than expected. Nonetheless, industry watchers debate how widespread or sustainable its resurgence is, particularly as relations with the U.S. continue to be frosty.
Certainly, China’s recovery won’t necessarily be linear. Peramunetilleke notes that earnings expectations for the shadow China basket have come down sharply, even as valuations look somewhat stretched, making earnings expansion all the more important for ongoing gains.
Nonetheless, he argues that for all the mixed data, the “China economic revival [is] on track. That makes shadow China companies, which give investors exposure to that nation without the heightened risk of owning China-listed stocks, attractive—as long as investors don’t overpay.
Peramunetilleke compiled a list of shadow China laggards with market caps above $5 billion that derive at least 10% of revenue from Hong Kong/China. The list includes stocks that have returned less than 20% since the start of November, and excludes companies that have cut full-year earnings estimates by more than 10%, and leaves out stocks trading above their five-year average forward price-to-earnings valuation.
That leaves him with a list of attractively valued stocks that could still benefit from China’s rebound, however fitful. High on that list are
Keysight Technologies
(ticker: KEYS),
Qualcomm
(QCOM),
Agilent Technologies
(A),
Danaher
(DHR),
Corning
(GLW),
Amphenol
(APH), and
Waters
(WAT) among others.
By contrast, he notes that some of the shadow China companies that have returned more than 20% since November have gotten pricey, in absolute terms and in relation to their five year average. Some of these names include
Nvidia
(NVDA),
Lattice Semiconductor
(LSCC),
Wynn Resorts
(WYNN), and
Skechers
(SKX).
Write to Teresa Rivas at [email protected]
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