China has begun to soften its COVID policies across major cities, a shift that has been long awaited by foreign investors. Long-term investment prospects for China continue to improve after a tumultuous few years, and while the road may still be a bit bumpy looking ahead, there is strong opportunity to capture the reopening rebound potential in the short term through China’s internet stocks.
Twenty cities across China have rolled back travel restrictions on buses and subways, and major metropolitan hubs such as Shanghai and Hangzhou have announced that a negative COVID test won’t be necessary for entrance into public places. It’s a major step, particularly alongside the public acknowledgement from the Beijing Institute of Respiratory Diseases that Omicron and its subvariants are not as deadly as earlier COVID-19 variants.
“At least there is a road map now, and investors know that we are not going back to the months of Shanghai lockdowns. For long-term investors, this is a good time to revisit China,” Vincent Che, head of equities at Ping An in Hong Kong, told The Wall Street Journal.
China’s internet sector is home to its largest growth companies; Alibaba, Tencent, and Meituan are all big movers in the sector and are uniquely positioned to capitalize on the rebound in China’s economy ahead of other sectors. Because of their exposure to both online travel booking and e-commerce, these internet giants will benefit from a population that is beginning to be on the move once more.
Trading overnight in Mainland China was “was led by growth stocks favored by domestic and foreign investors and reopening plays with liquor stocks having a strong day. Healthcare is off as investors fund their reopening positions,” explained Brendan Ahern, CIO of KraneShares, on the China Last Night blog.
Image source: China Last Night blog
Seizing Reopening Opportunity in China’s Internet Sector
The rollbacks aren’t a guarantee of a cessation in COVID lockdown risks in China, but they are a starting point and a major stance shift from a country that has, until now, remained resolute in its zero-tolerance policy. Volatility is likely to continue in Chinese stocks, but there is opportunity for investors with the appetite for it to capture the increase in domestic consumption likely to result in the rollbacks through the internet companies that stand to benefit most and are at some of their lowest valuations in years.
The KraneShares CSI China Internet ETF (KWEB) tracks the CSI Overseas China Internet Index and measures the performance of publicly traded companies outside of mainland China that operate within China’s internet and internet-related sectors. KWEB provides exposure to the Chinese internet equivalents of Google, Facebook, Amazon, eBay, and the like, all companies that benefit from a growing user base within China and a population on the move once more.
Another option is the KraneShares Hang Seng TECH Index ETF (KTEC), which offers exposure to Hong Kong internet stocks, e-commerce companies, fintech firms, and other tech-related companies. KTEC seeks to track the Hang Seng TECH Index which includes the 30 technology companies in Hong Kong’s burgeoning tech sector with the highest free-float market capitalization.
The fund invests primarily in China H shares — meaning shares of stocks that are incorporated in mainland China and trade on the Hong Kong Stock Exchange. In the last 30 days the Hang Seng TECH Index is up 27.48% and was up 9% Monday, though it’s still down -26.62% YTD.
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