Interactive Investor

China bounce: the UK shares to benefit from Covid optimism

11th May 2022 13:28

Graeme Evans from interactive investor

It looks like China is getting a grip on the latest outbreak of Covid in the country, which is good news for lots of UK companies. These are the stocks with the most positive reaction.

Shares in Prudential (LSE:PRU), Burberry (LSE:BRBY) and mining giants including Rio Tinto (LSE:RIO) rebounded today after a decline in new Covid cases boosted hopes for an end to lockdown restrictions in China.

The optimism, which follows a 51% fall in infections in Shanghai as well as fewer cases in Beijing, helped to offset some of the wider market’s recent concerns about slowing activity in the world’s second-largest economy.

A steep decline in the iron ore price has reflected these fears after China’s imports of the steelmaking ingredient fell again in April, and Premier Li Keqiang recently warned of a “complicated and grave” jobs situation due to curbs in Beijing and Shanghai.

The copper price, which has fallen by a fifth from a record in early March, rallied 2% today amid the potential end in sight to China’s growth-limiting Covid restrictions.

Stock market beneficiaries included Glencore (LSE:GLEN), which improved 14.85p to 470.35p, and iron-ore specialist Rio Tinto as its shares pulled out of their recent dive to rally 194p to 5,357p. The stock had been trading above 6,000p as recently as a month ago.

Hopes for a recovery in China consumer spending lifted Scottish Mortgage (LSE:SMT) Investment Trust, whose top 10 holdings include internet giant Alibaba (NYSE:BABA) and WeChat owner Tencent (SEHK:700). Shares were 15.2p higher at 795.6p, albeit still a long way short of the 1,500p seen in November prior to the dumping of tech-focused growth stocks due to interest rate fears.

Prudential shares got the biggest China bounce as investors hope the easing of restrictions will allow it to realise the potential of its recent pivot to faster-growing investment and savings markets in Asia and Africa.

The FTSE 100 stock rallied 35.2p to 918.2p but it remains 30% lower across the year, having recently gone below 1,000p for the first time since October 2020.

Its Hong Kong business has been adversely impacted by long-running border restrictions in place with mainland China. In 2020, this reduced Hong Kong revenues by 62% on a year earlier before a further 27% fall last year.

The company said in its recent annual results: “Recovery in sales levels will be dependent on the timing and extent of the easing of these restrictions, with the emergence of the Covid-19 Omicron variant further increasing uncertainty to the return of mainland China customers as well as the resumption of their demand for the group’s products in Hong Kong.”

Prudential continues to believe that its renewed focus on Asia will prove to be the right one strategically, given that the savings and investment market is developing rapidly in the region due to a growing middle class and as insurance penetration remains low.

The last piece of its restructuring jigsaw was filled in the autumn with the demerger of US-based Jackson National Life, having previously spun off its UK and European unit in the form of M&G.

Burberry’s shares are down by 16% in the year-to-date as its Asia Pacific business accounts for more than half of its 2021 revenues. The luxury goods group’s third quarter update in January showed mainland China store sales growth of 15%, but this was before the latest Covid setback.

Annual results are due next Wednesday, when new boss Jonathan Akeroyd will provide more detail on the recent performance. The shares rallied 72p to 1554p today, but this compares with more than 2,000p in February.

In the FTSE 250 index, shares in Aston Martin Lagonda (LSE:AML) improved 21.8p to 701.8p. In its recent results, the luxury car business reported record sales in China and strong initial demand in the country for its recently-launched DBX Straight-Six model.

Bootmaker Dr. Martens (LSE:DOCS) also rose 1.6p to 186.6p as China represents one of seven priority target markets for the company.

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