In China, last week saw big protests in reaction to the so-called “Zero Covid” policy of President Xi Jinping, a policy that took China back to the spring of 2020, with lockdowns of individuals and the quarantining of towns and cities. Officially, of course, the protests changed nothing, but cities did begin to change their individual regulations around the pandemic and, over the weekend, news broke that the national policy was about to change too.
Politically, that probably means that Xi was having doubts about the policy himself before the protests, rather than that he and the other Party leaders are channeling the will of the people. Economically, however, Xi’s motivation is irrelevant; the reality is that easing Covid restrictions will have a huge impact, both within China and outside.
First and foremost, this will impact inflation. The so-called “transient” issues that Jay Powell believed for a while were the main causes of inflation, supply chain disruptions and goods shortages, were exacerbated by the return to lockdowns in China, the world’s biggest manufacturer. A disrupted supply chain may not be the only thing pushing prices higher, but it certainly hasn’t helped, and the timing of renewed restrictions will have dampened and slowed the impact of rate hikes. If you try to slow demand, as the Fed has, but supply is constricted at the same time, the net impact is almost zero. That offsetting effect will be removed by even a partial return to normal in China, so bigger drops in the rate of increase in CPI over the next few months are likely, even if the Fed slows the pace of rate hikes. If we do see lower rate hikes and lower CPI increases simultaneously, we are in for a very good Q1 2023 for stocks in general.
Second, it will impact individual businesses substantially. It may be too late to rescue Apple’s (AAPL) holiday season, but it may well enable them to increase output and meet some of the pent-up demand in Q1 of next year. That is good news for them, but also for suppliers like Qualcomm (QCOM) and Skyworks (SWKS).
In fact, QCOM and SWKS may be the best way for investors to play this change of policy in China. Both stocks are down substantially from their highs a year ago, and previously high-flying growth names have fallen to the point where the trailing and forward P/Es of both are well below the market averages. That is largely down to Apple’s somewhat gloomy outlook predicated on supply restrictions, and therefore reduced manufacturing of iPhones. If those problems ease, as they will when China eases up on lockdowns, suppliers like QCOM and SWKS will be producing flat out to catch up, and as they do, they will produce profits as well as parts.
As the hated “Zero Covid” restrictions in China are eased, some will point to it as a victory for people power there. President Xi will probably quietly encourage that interpretation. It enables him to retain control while giving the impression of democracy, which has big international benefits, notwithstanding the danger to him of allowing people to think they have real power. Anyway, before long, history tells us that it is likely that the protests will be forgotten and credit will be given by state-run media to President Xi, both for enacting and then lifting the restrictions, and everyone will move on.
That may upset some advocates of democracy, but it will have economic benefits, not least for Apple and its suppliers. Buying stock in a couple of those suppliers may be a smart move as the changes take effect.
* In addition to contributing here, Martin Tillier works as Head of Research at the crypto platform SmartFI.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Image and article originally from www.nasdaq.com. Read the original article here.