Get 40% Off
👀 👁 🧿 All eyes on Biogen, up +4,56% after posting earnings. Our AI picked it in March 2024.
Which stocks will surge next?
Unlock AI-picked Stocks

ETF Watch: Considering China

Published 02/26/2019, 02:58 PM
Updated 05/14/2017, 06:45 AM

China stocks surged Monday following Trump’s announcement that he will be delaying US tariffs on China. Prospects for a trade agreement between China and the US are now looking very good. It is evident that both sides need a positive resolution and are willing to compromise. Last year, China’s stock markets experienced their worst year since 2008, with the Shanghai Composite dropping 24.6% and the Shenzhen composite tumbling over 33%. These markets appeared to bottom at year end and staged a strong recovery as trade tensions began to ease. This recovery is likely to continue if indeed a trade deal is reached.

The other main cause of last year’s plunge in China’s stock market was increasing signs of a slowdown in China’s economy, paired with uncertainty about the severity of the downshift. It has now become clearer that the slowdown is real but moderate, in contrast to the more dire predictions of some commentators. GDP growth is easing from 6.6% last year to 6.2% this year. In 2020, the economy is projected to expand at a similar and still very robust pace, thanks in part to the anticipated ample policy stimulus and easing of trade tensions.

As Morgan Stanley (NYSE:MS) has noted, China is steadily advancing toward high-income status and a current account deficit that implies the necessity of substantially higher capital inflows. That prospect should encourage further opening up of the economy. Another technical factor that will cause passive investment inflows is MSCI’s plans to increase China A-shares weights in its EM index this year and more in future years. Similarly, FTSE Russell plans to increase the weight of China A-shares in its FTSE Emerging Index.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

Changes in the structure of the Chinese economy provide some promising opportunities for investors. The economic slowdown has been mainly in the manufacturing sector, which used to be considered the most important part of the Chinese economy. According to Caixin Purchasing Managers Index data reported by Markit, while manufacturing companies’ output declined modestly in January, service-sector activity continued to expand “solidly,” with the result that the Caixin China Composite PMI for January signaled higher activity for the thirty-fifth month in a row.

Services, Services, Services

It is important to note that China’s services sector became a more important contributor to GDP than its industrial sector in 2013. It has steadily outgrown the industrial sector ever since. The fact that China has already changed into a services/domestic consumption-based economy is not widely recognized.

The Chinese consumer is breaking records. Total Chinese retail sales, which surpassed US retail sales for the first time in 2017, rose a further 9% in 2018 to about US$6.3 trillion. According to 2017 figures cited by KraneShares, Chinese web sales, at US$1.14 trillion, accounted for 19.6% of total Chinese retail sales, whereas US retail web sales, at US$453.5 billion, accounted for just 8.9% of US retail sales. And there is still substantial room for China’s internet population, which is currently less than 60% of the total population, to grow.

Investors now have 46 US-listed ETFs for Chinese stocks, excluding those ETFs using leverage. Many of these still have limited assets under management (AUM), which implies limited liquidity. There are just 10 that have AUM of at least US$100 million: FXI, MCHI, KWEB, GXC, ASHR, CQQQ, KBA, PGJ, CHIQ and CXCS.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

The largest China ETF, the iShares Large-Cap, FXI, invests in 50 large-cap China stocks traded in Hong Kong, with a heavy concentration of financials, particularly state-run banks. It is up 15.20% year-to-date February 25. The second and fourth largest Chinese ETFs invest in the “total market” (not including A-shares) with a tilt toward financial and technical firms. The iShares MSCI China ETF, MCHI, has gained 17.92% year-to-date. Similarly, the SPDR S&P China ETF, GXC, is up 17.56%.

The third largest China ETF takes a more direct aim at the Chinese consumer and internet web sales. KraneShares CSI China Internet ETF, KWEB, has gained 26.19% year-to-date. This ETF tracks only overseas-listed Chinese shares of internet-sector companies, primarily US-listed N-shares. Also of possible interest is the Investco China Technology ETF, CQQQ, which holds a broad range of technology companies, including US-listed shares. CQQQ has also outperformed this year, gaining 24.31% year-to-date.

Investors considering adding China-specific ETFs should take account of the China exposure they may already have in more aggregate ETFs. For example, the iShares MSCI Emerging Markets ETF, (NYSE:EEM), includes China stocks with a weight of 10.6% and Hong Kong stocks with a weight of 23.15%. Also, China ETFs have historically been subject to wide swings and the relatively high volatility is likely to continue.

Sources: Morgan Stanley Research, KraneShares, Caixin, HIS Markit, CNBC, ETF.com, IMF

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.