Stocks to buy as China decouples from the west

As investors around the world watch their local markets tank, many are being drawn to the sudden allure of Chinese equities.

Pete Sweeney, the Asia economics editor for Reuters, says Chinese equities do “look cheap,” having broadly fallen for more than 12 months.

“On paper at least, this sort of decoupling (from other markets) provides just the sort of hedge traders want when their local markets crash,” he wrote.

It’s a sentiment shared by Brendan Ahern, the chief investment officer for KraneShares, which manages a suite of China-focused ETFs.

In an interview on CNBC, Ahern said ‘KraneShares CSI China Internet ETF’ (KWEB) is performing strongly in a grim global environment.

“It’s been a terrible week for US equities, European Equities, for Asian equities … and yet you’ve got KWEB looking to end the week probably up about 10 per cent,” he said.

“So you’re looking at 15 per cent out-performance versus the S&P 500 this week alone.

“So I think investors need to potentially … take advantage of the performance we’re seeing within this space.”

Which China stocks to buy?

A big reason for China’s struggles over the past 12 months was a regulatory crackdown on tech stocks at that hands of the Chinese Government, however Ahern believes there’s been a shift.

“I think there are lots of signs that this regulatory cycle is likely over or is in the very late innings,” he said.

“(That is) simply based on the user protection laws that went into place at the end of last year and certainly speeches like the (one) from Vice Premier (of the Chinese Communist Party) Liu He back on March 16.

“So … I think we’re very confident that probably the worst is over. I think we’re much less concerned today.”

This means, from a valuation perspective, Ahern believes one promising stock could be Alibaba, which over the past month has seen its stock price soar.

He also mentions search engine provider Baidu, ecommerce giant JD and Hong Kong listed companies Tencent, Meituan and Kuaishou.

“Most of these names are still 1 to 2 standard deviations below their historical five-year valuation levels so we think there’s still a good opportunity,” he said.

Exercise caution

Investors in Chinese equities may be celebrating, but Pete Sweeney has reminded people of the troubles facing Chinese developers, the dangers of a recession among trading partners, a looming unemployment crisis and the zero-Covid policy lockdowns.

“China’s discount is therefore less attractive than it looks,” he said.