By Jack Pitcher

Wall Street sees a lot to like about Chinese stocks, but there are many skeptics who see better ways of betting on a rebound in the second-largest global economy.

As the country's long-awaited reopening unleashes three years of pent-up consumer demand, analysts see opportunities to profit from a growth wave. Early data point toward a fast rebound in traveling, eating out and "revenge spending" by Chinese consumers after years of severe restrictions.

The MSCI China Index, which tracks Chinese companies listed in the U.S., Hong Kong and the mainland, has rallied about 30% since the end of October when it became clear the country was ending its zero-Covid policy. The S&P 500 has edged up 1.2% over the same period.

Goldman Sachs Group Inc. has called for the MSCI index to reach 85 by year end, an increase of more than 33% from Thursday's closing level of 63.6. UBS Group AG, meanwhile, labels Chinese equities the "most preferred" of its global strategies, writing in a report Tuesday that equity markets exposed to China's reopening look like a better opportunity than U.S. markets, where valuations are higher and a recession may be on the horizon. Plus, the crisis of confidence in the U.S. banking sector adds more uncertainty to the investing climate.

But just as China's economy is heating up, relations with the U.S. are souring. Verbal attacks on the U.S. by Beijing's top leadership have renewed concerns about how investable the world's second-largest economy is for outsiders.

In a worst-case scenario, sanctions similar to those levied against Russia in the wake of the Ukraine invasion could render U.S. investors' Chinese holdings worthless. The MSCI index has fallen about 15% since late January when a Chinese spy balloon was first tracked in U.S. airspace.

"Investors usually ask us the China question," said Richard Mercado, a Paris-based global equities portfolio manager at Comgest SA. "They are thinking twice before going into China because of political instability, even if it means missing out on some of the recovery trade."

Instead, many investors are looking for ways to bet on Chinese growth while keeping direct exposure to Chinese equities, and the political risks that come with them, minimal.

One way to play China's reopening without betting on China directly, strategists say, is to invest in any of the big consumer brands with a significant presence in the country. Starbucks Corp., Nike Inc., Marriott International Inc. and French luxury goods giant LVMH Moët Hennessy Louis Vuitton SE would fit that bill, they say.

Mike Edwards, deputy chief investment officer of New York hedge fund Weiss Multi-Strategy Advisers, said his firm is betting on companies outside China that can benefit from the reopening, including travel companies with significant China business and European luxury brands. It is avoiding semiconductor manufacturers and private companies with potential military applications, due to the risk of future U.S. sanctions.

"We've added considerably more exposure to China growth as a factor, but not necessarily to China directly," Mr. Edwards said.

Despite cold feet from some, money is flowing into Chinese equity funds. Investors have put $8.2 billion into dedicated China equity funds this year through March 8, according to fund-flow data provider EPFR. Inflows to China technology and healthcare/biotechnology sector funds have risen of late, while Hong Kong equity funds have also seen big inflows.

"In the U.S. the policy tailwinds have turned into headwinds while in China the opposite is the case," said Cameron Brandt, EPFR's director of research. "China wants investors to like it again."

While the Federal Reserve attempts to tame the U.S. economy by tightening monetary policy, China's government is taking a more accommodative stance. Fears of government interference with the country's technology firms have also eased, and the valuations of those firms are cheaper.

Alibaba Group Holding Ltd.'s American depository receipts, for example, recently traded at about 9.6 times expected earnings over the next 12 months. That compares with a valuation that approached 30 times earnings in 2019 and 2020. The S&P 500 has a forward multiple of about 17.5.

For those willing to buy shares of Chinese companies, opportunities abound, says Ray Vars, a portfolio specialist at $55 billion asset manager Harding Loevner, based in New Jersey. The firm has been increasing the Chinese equity allocation in its global strategies and adding to positions during the recent pullback, with a preference for travel, sportswear and cosmetic companies along with select financials. Getting clients on board is the hard part.

"China went from a darling to a little bit of a pariah, particularly after the Russia invasion," said Mr. Vars. "I think history has demonstrated time and again that stocks can feel uninvestable today but turn out to be great investments going forward."

-- Hardika Singh contributed to this article.

Write to Jack Pitcher at jack.pitcher@wsj.com

(END) Dow Jones Newswires

March 18, 2023 10:00 ET (14:00 GMT)

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