Shares of Chinese stocks jumped last week thanks to some revisions to the country’s “zero covid” policy.
If you’ve been following the most popular Chinese stocks, you know that the last two years have been absolutely brutal for Chinese investors.
In March of 2021, the iShares China Large Cap ETF (FXI) peaked at $54.53. This fund is essentially the Dow Jones of China stocks.
Last month, the fund hit a low of $20.87, representing a 62% decline. That’s a huge drop for a fund that is supposed to track “safe” large-cap established companies.
Much of this decline can be attributed to China’s “Zero Covid” policy.
The policy is responsible for mass quarantines, factory shutdowns, restricted travel, and an overwhelming burden to the country’s economy.
Last week, China released an update to it’s policy. Investors are now betting that this revision could help the Chinese economy continue to grow. And they’re piling into Chinese stocks to profit from the shift.
Today, I’ve got a different way for you to play the policy change.
But first, let’s look at how exactly these policies are changing.
Relaxing Zero Covid Standards
Late last week, CNBC’s Eunice Yoon gave us a helpful overview of China’s new covid restrictions. You can check out her report here.
China’s leadership has been careful to characterize this as an “optimization” of its policy. In other words, the country isn’t admitting that the previous policy failed.
But clearly a change needed to be made, and these are the current shifts to China’s “Zero Covid” policy
Travelers TO China
– Visitors to china must quarantine in a hotel for only 5 days. (The previous length was 7 days.)
– Only one Covid test required over a 48 hour period. (Previously new visitors were required to take multiple tests.)
– Flights will no longer be suspended if a positive case is reported. (Previously, flights were sent back to their origin if a single case was reported on board.)
Residents IN China
– China will no longer isolate “close contacts of close contacts” of positive cases. In other words, the policy will only target contacts with one degree of separation from someone who tested positive.
– Three risk levels (high, medium and low) will be established. Presumably, more people will fall into “medium risk” and therefore fewer people will be under the strictest lockdown protocols.
– Citywide mass testing discouraged. This should help China officials save face because they won’t be testing everyone. So we shouldn’t see as many positive results.
A Better Way to Play China’s Reopening
Chinese officials aren’t admitting that the “Zero Covid” policies have been ineffective. Not publicly anyway…
But the shifts made last week will certainly help the country’s overall economy. And that’s what investors are excited about.
Still, I don’t recommend a long-term investment in FXI or in shares of individual Chinese companies.
There’s just too much risk in many of these names. And with so much uncertainty with China’s political agenda, I wouldn’t be surprised to see another policy shift that hurts investors.
On the other hand, the shift to China’s “Zero Covid” policy will certainly drive China’s energy demand sharply higher.
Factories are set to ramp, travel will pick up, and Chinese citizens will enjoy a more normal way of life. And that means demand for electricity, diesel, gasoline and jet fuel will pick back up.
Remember, the energy market is global in nature. So if demand from a large country like China picks up, it can further shift the supply / demand imbalance.
Bottom line, China’s reopening will create more demand for oil and refined fuel.
This at a time when the world is already dealing with shortages.
So investments in energy plays should benefit from China’s shift away from its Zero Covid policy.
Consider buying exploration and production stocks, pipeline stocks, and energy refining plays.
These areas of the market are already strong — and should give you even bigger profits as China’s economy picks back up.
Watching Energy Plays and Other Opportunities
I’ve got my eye on several energy plays that could benefit from China’s new policies.
These stocks are already doing well thanks to a supply / demand imbalance for energy resources.
Last month I showed you a chart of US Diesel inventories. They’ve been drawn down to an alarming level where there is only 25 days of supply left.
Shortages like these create opportunity. Which is why my 20/20 Watch List currently features a number of high value energy plays for your investment account.
If you haven’t checked out the Watch List, you’re missing out!
This list is designed to give you vision into what’s happening in the overall market — and the best stocks to trade right now.
The list includes 20 bullish plays, 20 bearish plays (expected to trade lower), and 20 stocks you can use to as income plays.
You can see all 60 of these opportunities with a free copy of my watch list.
The list is updated each week — adding new names when opportunities arise, and taking names off that are no longer quite as attractive.
I’d love for you to take a look at the list and let me know what you think!
Here’s to growing and protecting your wealth,
Zach
