Chinese equities and country-specific exchange traded funds may have more room to run as active fund managers shift from their underweight China exposure.
ETFs that track Chinese companies are among the best performers this year. Year-to-date, the iShares China Large-Cap ETF (NYSEArca: FXI), the largest China-related ETF that tracks Chinese companies listed on the Hong Kong stock exchange, rose 24.8% Similarly, other China H-shares ETFs have stregnthened, including the SPDR S&P China ETF (NYSEArca: GXC) up 23.6% and the iShares MSCI China ETF (NYSEArca: MCHI) 26.5% higher so far this year. [China H-Shares ETFs Get Their Moment in the Limelight]
The China H-shares-related ETFs are trying to catch up to the surge in China A-shares. For instance, the db X-trackers Harvest CSI 300 China A-Shares Fund (NYSEArca: ASHR) increased 30.7, Market Vectors ChinaAMC A-Share ETF (NYSEArca: PEK) rose 34.2% and KraneShares Bosera MSCI China A ETF (NYSEArca: KBA) gained 35.0% so far this year.
Chinese stocks could still outperform ahead as active managers begin shifting into the market.
“Funds of various mandates are underweight the market in a range of 140-600bp, and thus have marked benchmark stress and a need to raise exposure to China,” Goldman Sachs said in a note, according to CNBC. “If emerging market funds alone increase allocations in the largest underweight sectors in China to marketweight, inflows could be worth $26 billion.”
Active managers may be pressured to increase their positions in the Chinese markets after funds have underperformed their benchmarks for their worst performance since 2009, Goldman said. Specifically, only 20% of emerging market funds and 40% of Asia ex-Japan funds have outperformed their respectively benchmarks this year, compared to the 60% to 70% average over the past five years, due to many funds’ underweight China position.