China has been in a prolonged bear market as its property bubble burst and concerns over Europe’s debt crisis continue to punish the country which is highly dependent upon exporting goods.
The world’s second largest economy was one of the worst performers in 2011 as investors sold out of all emerging markets on a significant deflation scare. [China ETFs Hit by Hard Landing Fears]
However, just because something has gone down doesn’t mean it isn’t a good investment.
Take a look below at the price ratio of the iShares FTSE China 25 Index Fund (FXI) relative to the S&P 500 (SPY).
A rising price ratio means the numerator/FXI is outperforming (up more/down less) the denominator/SPY.
Notice that China relative to the U.S. peaked around August of 2009 – a long long time ago. Since then, the ratio has been in a long downtrend, underperforming U.S. markets and significantly.
The ratio spiked up during the October rally, but then fell off as Italy’s 10 year bond yields first rose above the 7% level, declining since. However, the ratio appears to be stabilizing as investors debate whether China is actually a buy at these levels.
There is little doubt that China, much like every emerging economy, has gone through its fair share of bumps and bruises along the road to development, but that does not mean the country will underperform the U.S. forever. If anything, the bearishness has been so significant in the country’s equity markets that 2012 may be the year when China’s markets substantially rally.
More so than that, given that FXI in particular has a heavy weighting towards banks which have gotten clobbered, any kind of move higher in the financials sector would directly benefit the ETF.
iShares FTSE China 25 Index Fund
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter.