Why Investors Should Revisit China ETFs

(ETF Trends) -- Amid trade tensions and a broader slump in emerging markets indexes, China ETFs, such as the iShares China Large-Cap ETF and the iShares MSCI China ETF, were drubbed in 2018.

Those ETFs and other China ETFs are on the mend to start 2019, prompting some market observers to encourage investors to revisit stocks in the world’s second-largest economy.

“China is up more than 8% this year (as of 1/28/19), easily outperforming the S&P 500 Index, which is up 5.6%.  We see three reasons for the turnaround and for optimism for Chinese stocks.” said BlackRock in a note out Tuesday.

Easing trade tensions between the U.S. and China, the world’s two largest economies, are bolstering the fortunes of Chinese stocks and ETFs such as FXI and MCHI this year.

“Although tensions are not likely to go away over the long term, we see room for trade frictions to subside in the short run,” said BlackRock. “Both sides have incentives not to escalate the conflict and December’s market volatility in the U.S. stock market has led to wider recognition that trade tensions could hurt domestic business confidence and employment.”

What’s Next for China

Recent data points indicate traders are buying some marquee ETFs tracking developing economies.

After the recent pullback in the equities market, bargain hunters may look to beleaguered emerging market stocks and region-related ETFs for value. Many of those ETFs feature China as the largest geographic exposure.

Investors appear to be embracing the ideas that the dollar will weaken this year and that the Federal Reserve will slow its pace of interest rate hikes or that no rate increases at all will be delivered in 2019.

China’s efforts to stimulate its massive economy also make the case for considering the country’s equity markets.

“Chinese policymakers have rolled out a number of monetary, regulatory, and easing measures to help support growth and mitigate the negative sentiment that has resulted from the trade tensions and growth slowdown,” according to BlackRock.

“Recently, China announced 1.3 trillion yuan ($193 billion) worth of new measures including tax cuts for small businesses and reduced tariffs. Other policy implementations such as greater financial market openness, private sector support and infrastructure spending could further support economic growth and boost Chinese equities.”

Data suggest Chinese stocks are also inexpensive.

“Chinese equities have cheapened significantly to a forward PE ratio of 10.6 from the 2018 high of 14.8,” said BlackRock.


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