A reopening in the world’s second-largest economy could spell a buying opportunity for investors as China unwinds much of its Covid restrictions. This week, China’s National Health Commission said that arriving international travelers no longer need to quarantine starting Jan. 8. The decision was the latest in a significant easing of the Beijing’s zero-Covid policy over the past month following nearly three years of strict regulations. Investors have taken the recent developments as a signal to start snapping up China equities. They expect the country’s economy could get a boost in 2023, while the U.S. and Europe continue to deal with the lagging effect of monetary tightening that could put a damper on economic growth. What’s more, they say that Chinese equities are cheap on a historical basis, and cheap compared to their emerging market peers. While both the Shanghai Composite and Hang Seng Index have pulled off their 2022 lows, both are down more than 14% this year. This month, Morgan Stanley said that Chinese equities have a “steep climb” after their underperformance during the pandemic. “A lot of institutional investors have been very underweight Chinese equities,” said Carlos Asilis, co-founder and CIO at Glovista Investments. “And I think that that’s been a mistake, because it has ignored this very important potential baseline case which is now being priced in, which is that of the Chinese economy undergoing next year a similar recovery path that we saw this year in the case of the United States,” he added. A reopening play in services An easing in Covid-19 restrictions could signal a rebound in the sectors most affected by the policy, such as restaurants and airlines, as well as leisure stocks. For Ben Kirby, co-head of investments for Thornburg Investment Management, a lifting of restrictions could mean a rise in fast-food restaurant stock Yum China . The company operates the KFC, Pizza Hut and Taco Bell brands in China. It was spun off the American Yum Brands in 2016. Yum China is the fourth-largest position in the Thornburg Developing World Fund (THDAX) , which has a roughly 29% allocation to China. The portfolio is down about 27% this year. “People are not encouraged to go out and live their lives, as they normally would. But even through it all, Yum China plans to build new stores, and we think that the earnings power of the business continues to increase,” Kirby said. The portfolio manager also likes AIA Group , a Hong Kong-based American insurance company that Kirby expects could disrupt the traditional insurance model in China. The stock is the third-largest allocation in THDAX, with a greater than 3% weighting. “Those are two ideas we have that we think will benefit when the Chinese economy reaccelerates,” Kirby said. “But at the same time, because they are such quality businesses with structural growth potential, we don’t think that they’re going to be bad stocks even if the economy takes a little bit longer to open.” Meanwhile, a rebound in China could mean a lift in emerging markets equities as the country’s economy grows in importance going forward. Glovista’s Asilis expects companies based in Thailand, Philippines and Malaysia could see more “significant growth” from exposure to China than Western multinationals. Some emerging-markets stocks with greater revenue exposure to China include Taiwan’s Catcher Tech and Synnex Tech, which have 70% and 61% revenue exposure, respectively, according to a Bank of America note. Challenges ahead To be sure, there are a slew of challenges adding to positions in China. Arthur Laffer, Jr., president at Laffer Tengler Investments, has a negative outlook on China equities, saying the country has eroded trust with investors in the past given the government’s influence over the business sector. He cited Beijing’s crackdown last year on for-profit tutoring companies as a troubling sign for corporate profits. “Any kind of major reopening of the Chinese economy has got to be short-term bullish,” Laffer said. “You can easily get a very big pop just from reopening the economy, because you’ve been holding it down with the mandated Covid lockdowns.” Laffer added, “The question is, once you get the pop, then what happens?” Still, Glovista’s Asilis noted that it’s in China’s interests to continue to build trust with other nations, saying the country “needs the rest of the world from an economic perspective more than it did before” — at least over the medium term. However, he said that investors will have to be cautious as they identify sectors and opportunities that are attractively valued in the country. “Potential GDP growth for China is likely lower in the next decade than it was in the last decade. However, we see the country continuing to try to shift growth, to more sustainable sources of growth,” Thornburg’s Kirby said.