New hope China may soften on Covid boosts our stocks most tied to world’s No. 2 economy
Estee Lauder (EL) and other Club holdings with meaningful exposure to the Chinese economy bounced Friday, following news that BioNTech ‘s (BNTX) Covid vaccine will soon be available to foreign residents living in China. We’re cautiously optimistic about the vaccine development , which adds to hopes that Beijing will soften its restrictive pandemic policies after years of regular virus testing, limits on travel and rolling lockdowns that have weighed on the world’s second-largest economy. A former Chinese public health official also suggested that “substantive” changes to the government’s so-called zero Covid policy could take place in the coming months, according to Reuters . To be sure, it’s important to remain measured, and we always take speculation out of China with a grain of salt. After all, Chinese officials have not announced an official transition away from their very strict Covid policy. Friday’s vaccine news is narrow in scope: The mRNA Covid shot made by Germany’s BioNTech and U.S.-based Pfizer (PFE) will only be available to expatriates who live in China. Nevertheless, the moves in certain stocks tied to China — including many owned by the Club — show the market is taking the vaccine policy change in stride. Estee Lauder shares surged more than 7% to around $208 apiece. The cosmetics giant has a big China business and just a few days ago it cut its sales guidance partly due to China’s Covid policy. Shares of Starbucks (SBUX), which counts China as its second-largest market outside the U.S., jumped about 7%. Strong quarterly results released Thursday evening are likely helping the stock, too. Wynn Resorts (WYNN) shares rose nearly 4%. The casino operator has two important properties in the gaming hub of Macao, which is a Chinese special administrative region. Crude prices bounced about 4% on Friday, likely due to the China news because a more complete economic reopening in the country would spur oil demand. The price move provided some support for oil stocks in Friday’s volatile stock market. Details on the vaccine news Speaking in China on Friday, German Chancellor Olaf Scholz announced that Beijing would make BioNTech’s Covid vaccine available to foreigners in the country. It would mark the first time that China allowed a vaccine that was not developed domestically to be administered within its borders. BioNTech is a Germany company, and its mRNA-based vaccine — developed alongside Pfizer — is generally seen as being more effective than the vaccines made by Chinese firms. It’s not immediately clear when expatriates in China could actually start getting a shot of the BioNTech-Pfizer Covid vaccine. While its availability is limited to a certain cohort for now, Scholz reportedly advocated for broader accessibility in the country. “Of course, this can only be a first step. I hope that the circle of eligible persons can soon be widened to a general free ability of the BioNTech vaccine,” Scholz said Friday, according to Reuters. What it means for the Club Will Chinese President Xi Jinping and other communist party leaders heed Scholz’s plea? Nobody can say for sure. That’s why we stress the importance of interpreting this news in a measured way. But, as we’ve suggested before, we don’t think the Chinese government can maintain its restrictive pandemic approach forever. Its economy has shown weaker growth than recent history , and we think eventually Beijing will moderate its public-health stance in a way that benefits companies operating there. Since we cannot predict for sure when that would occur, we’ve been patient with names like Wynn Resorts — trimming our position to just a 0.5% weighting but still holding on to some shares on the hope that China would materially reopen. Similarly, we wanted to get back into Estee Lauder before there was an official announcement that China was ending zero-Covid. We saw enough progress on that front to restart our EL position in late September , and Friday’s vaccine developments join the list. On Starbucks, the coffee chain continues to invest heavily in China and open new stores in the market, betting on its long-term viability as a growth engine . We understand management’s big-picture view, and we were willing to take a stake in the company in late August with a recognition we’d need to be patient around China. “We anticipate the current Covid-related uncertainty to continue and repeat the view we shared on our Q3 call and our Investor Day that while our long-term aspirations for China remain undiminished, we expect the recovery of our business in the country to be nonlinear,” Starbucks interim CEO Howard Schultz said on the company’s earnings call Thursday night. A number of other Club stocks, such as Apple (AAPL), Qualcomm (QCOM) and Procter & Gamble (PG), have sizable China businesses that stand to benefit from a relaxation of Covid policies insofar as that boosts the economy. For example, P & G said last month it’s still being hurt by lockdowns in China and a general lack of consumer confidence. “We had certainly hoped for that to ease, but we still see significant negative impact on consumer mobility from the continued strict Covid policies,” P & G’s finance chief, Andre Schulten, said on the company’s first-quarter earnings call . “We feel well positioned – once we see consumer mobility return, we feel very strongly about our ability to grow in the market,” the CFO added. QCOM and PG shares rose Friday. But AAPL did not see any immediate benefit from the China news. (Apple has been mired in the malaise surrounding Big Tech. The stock, including Friday, was on a five-session losing streak since last Friday’s pop, the day after solid earnings .) (Jim Cramer’s Charitable Trust is long PG, EL, WYNN, AAPL, QCOM. See here for a full list of the stocks.) 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Estee Lauder (EL) and other Club holdings with meaningful exposure to the Chinese economy bounced Friday, following news that BioNTech‘s (BNTX) Covid vaccine will soon be available to foreign residents living in China.
