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Where Morgan Stanley has its eyes as China’s reopening continues

Fri 10 Feb 23, 3:12pm (AEST)
A depiction of the Chinese flag and the Australian flag in close contact, representing a close relationship between both countries
Source: iStock

Key Points

  • Morgan Stanley published its latest research note on China’s re-opening impacts for Australia on Friday
  • The investment bank’s analysts see commodity strengths continuing
  • They also see upside for winemakers and student housing providers with rent inflation likely to continue

China’s re-opening will be a boon for Aussie exporters, according to a note released this week by Morgan Stanley.

Morgan Stanley is more bullish on China than other banks, given that it expects the country’s GDP growth in 2023 to reflect 5.7%, one of the higher reads out there. 

The one commodity most directly related to China’s reopening is Iron Ore, the price of which has climbed 10% since January. 

The macro context? The Xi Jinping government stepped back from its COVID-zero policy late last year following violent protests all across the country. 

That move came as something of a surprise from the typically hardline Jinping government, with many forecasters earlier predicting China would stay in lockdown through 2023. 

“We see a tailwind to Resource sector earnings, while easing trade tensions raise the prospect of broader exposure to China's consumption recovery through both goods and travel,” analysts wrote. 

Market overlooking Chinese re-opening 

“We believe the market is still under-appreciating the far-reaching ramifications of China's reopening and the possibility that a good cyclical recovery can occur despite lingering structural headwinds,” Morgan Stanley analysts wrote. 

All in all, the investment bank is most bullish on commodities exporters. 

But the investment bank also highlighted two specific stocks in particular also expected to benefit: one dealing in wine, and one dealing in education. Then there’s student housing. 

Morgan Stanley not alone in iron ore confidence 

Iron ore prices continue to rise, though some analysts believe the January 2023 rally may soon ease off. 

Morgan Stanley’s local counterpart Macquarie sees good things ahead for iron ore miners in Australia (except for Fortescue [ASX:FMG]), based largely on increasing demand for 62% iron grade product from Australia.

That demand, of course, is coming from a reawakening China. 

Energy considerations 

China’s re-opening is also the predominant catalyst in keeping Brent Crude prices elevated at this current time. Brent Crude is the international oil benchmark pretty much everyone except for America uses.

Australian energy stocks typically track the Brent Crude price. 

Energy’s bull run through 2021 and 2022 may have less to offer ASX investors in terms of direct exposure to Chinese demand, but the continent’s re-opening will inform global energy price movements for the forseeable future. 

Morgan Stanley also ranked Woodside (ASX:WDS) and Santos (ASX:STO) a BUY earlier this week

A look at Woodside's one year chart
A look at Woodside's one year chart

Looking at wine 

That last comment references the import bans Chinese whacked on Australia during the Scott Morrison era. Wine exports to China were informally banned to such an extent the UK is now our largest wine destination.

But Morgan Stanley sees Treasury Wine Estates (ASX:TWE) benefiting from the Chinese re-opening, so long as exports are allowed to flow back into China

“Potential easing trade tensions could lead to early removal of China's tariffs, which presents upside risk for TWE, in our view. We believe a removal of tariffs would likely accelerate the pace at which TWE could return to historical volumes,” analysts wrote. 

Of course, this depends on the machinations of China’s (and our own) governments, who appear intent on maintaining a theatrical rivalry. So does the US, too, despite the fact US-China trade is approaching record highs. 

TWE's one year chart
TWE's one year chart

And then there’s education 

IDP Education (ASX:IEL) is the second stock highlighted by Morgan Stanley as the investment bank searches for stocks most likely to directly benefit from Chinese re-opening. 

In this instance, the boon for IEL shareholders is tipped to be the return of foreign students in larger numbers back towards pre-Covid levels. 

“Chinese policy now directs students to return in person to foreign universities where they have been studying online,” Morgan Stanley analysts noted. 

“[This] gives our consumer team more confidence in the recovery of China student placements given the significant change in policy and the pace of reopening.

Student housing 

Those students will need places to go, which is also why Morgan Stanley has tipped Stockland (ASX:SGP) and Mirvac Group (ASX:MGR)

In short, SGP and MGR are set to benefit from a tight rental market, given there are already concerns about foreign student homelessness

“The combined effect of higher migration and broader housing affordability problems have led to a very tight rental market, therefore students needing accommodation quickly could push rental yields higher,” analysts wrote. 

Morgan Stanley is also watching to see if this breathes new life into Australia’s troubled construction sector. 

“We believe this could spark increased demand and an incremental tailwind for sell-through rates, and could also build a case for a renewed construction cycle."

Written By

Jonathon Davidson

Finance Writer

Jonathon is a journalism graduate and avid market watcher with exposure to governance, NGO and mining environments. He was most recently hired as an oil and gas specialist for a trade publication.

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