Key takeaways:

• China has recently taken steps to adjust its approach to managing the pandemic 

• If the Chinese government pivots away from COVID-zero entirely, commodities, consumer discretionary businesses, and China-linked HKEX companies will be well-placed to benefit

For the best part of the last two and a half years, China has implemented the most stringent practices to contain the coronavirus. 

While the country has enjoyed much success in quashing COVID outbreaks, the implications of its approach have been felt across the world. From supply chain bottlenecks, to diminishing economic growth, China COVID-zero strategy has not been without tradeoffs.

More recently, however, there are small signs emerging that the country is shifting its approach to the pandemic. Chinese policy-makers have unwound and amended various pieces of policy to strike a more balanced approach to contain the pandemic and drive economic growth. 

If China moves towards a full reopening' and pivots away from COVID-zero entirely, there could be upside for equities. Here are some of the areas that stand to gain if restrictions are lifted.

1. Commodities

As the world second largest economy, China manufacturing activity and exports are the linchpin of its growth. In more recent times, growth has stalled across these areas. In fact, Chinese exports contracted in October, which was the first time this has happened since the start of the pandemic amid another flare-up in COVID cases and sweeping restrictions. 

Elsewhere, concerns about a blow-up in the property sector have dampened construction activity, even with the government providing support. This long, drawn-out downturn in economic activity has weighed on commodities, including iron ore and copper. 

However, commodities stand to benefit in the event China moves away from its zero-tolerance approach to managing the pandemic. Iron ore is tied directly to steel production, which in turn relates to manufacturing. Meanwhile, copper is often viewed as a barometer for the strength of the global economy. 

The above explains why iron ore stocks like Fortescue Metals (ASX: FMG) and BHP (ASX: BHP), as well as copper stocks like Sandfire Resources (ASX: SFR), OZ Minerals (ASX: OZL), and Freeport-McMoRan (NYSE: FCX) rallied strongly after rumours first suggested China could pivot from its COVID-zero approach. There may be further upside here if this transpires into reality.

2. Consumer Discretionary Businesses 

One of the trends that occurred when the US, Europe, and Australia relaxed their COVID management policies was improved sentiment among consumer discretionary businesses. 

China is the world's second largest consumer market, with a middle-income group exceeding 400 million people. Should China follow in the footsteps of other countries and relax most of its COVID policies, that would mean the rest of the world is once again reconnected' with Chinese consumers thanks to looser travel restrictions. This would translate into a significant increase in discretionary spending in markets outside China.

Segments that stand to benefit include US (and European) leisure operators like hotels and casinos, luxury goods retailers, as well as branded apparel and footwear. 

Some of the stocks that operate across these areas include Marriott International (NASDAQ:MAR), Hilton Hotels (NYSE: HLT), MGM Resorts International (NYSE: MGM), Wyndham Hotels & Resorts (NYSE: WH), Las Vegas Sands (NYSE: LVS), Caesars Entertainment (NASDAQ: CZR), Nike (NYSE: NKE), Lululemon (NASDAQ: LULU), and Prada (HKG: 1913).

3. China-Linked HKEX Stocks

The Stock Exchange of Hong Kong arguably offers the most upside from a COVID-zero pivot out of China. The Hang Seng, which is a major index tracking the performance of roughly 50 of the largest companies listed on the HKEX, recently hit its lowest level since 2009. 

Speculation and rumours about China changing tack sparked a major relief rally across the Hong Kong share market, although shares are still effectively trading at a multi-year low. The biggest beneficiaries of potential loosening in COVID policy include Chinese HK-listed companies across domestic tourism, but also a range of other areas.

In terms of domestic tourism, this spans a number of sub-industries like gaming, hotels, and aviation. Airlines like China Eastern (HKG: 0670) and Air China (HKG: 0753) should see direct benefit as passenger volumes increase, as happened in most other regions across the world. Casino and hotel stocks such as Wynn Macau (HKG: 1128) and Melco International (HKG: 0200), among others, and even leisure tourism groups like Fosun Tourism (HKG: 1992) would enjoy more stable operating conditions, with less impact on their operations, and potentially higher patronage.More broadly, China-linked shares on the HKEX could benefit from a shift in investor sentiment, with the cohort largely tarnished by pessimism about the direction of the nation economic growth. That means big-name favourites like Tencent (HKG: 0700), Alibaba (HKG: 9988), and Meituan (HKG: 3690) could find their feet again if the macro outlook improves.