Chinese stocks and country-specific exchange traded funds are stumbling after a surge this year, and some are calling for a continued cautious approach to the emerging market.
Over the past week, the iShares China Large-Cap ETF (NYSEArca: FXI), the largest China-related ETF that tracks Chinese companies listed on the Hong Kong stock exchange, dipped 5.1%. Similarly, other China H-shares ETFs have weakened, with the SPDR S&P China ETF (NYSEArca: GXC) down 4.8% and the iShares MSCI China ETF (NYSEArca: MCHI) 4.8% lower. [A Word of Caution on the China H-Shares ETF Rally]
Additionally, the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR), which tracks mainland Chinese A-shares, declined 5.6% over the past week while KraneShares Bosera MSCI China A ETF (NYSEArca: KBA) fell 5.7% and the Market Vectors ChinaAMC A-Share ETF (NYSEArca: PEK) decreased 6.0%.
With Chinese companies showing their weakest corporate profits since 2009, Jonathan Garner, the chief Asia and emerging market strategist at Morgan Stanley, downgraded Chinese equities for the first time in over seven years, reports Kana Nishizawa for Bloomberg.
Garner lowered his outlook of the MSCI China Index to equalweight from overweight, citing rising valuations and deteriorating earnings – the gauge’s price-to-book was at its highest since March 2012 and return-on-equity is at lest lowest since the financial downturn.
“China is no longer going to outperform other emerging markets,” Garner said in the article. “We’d like to recommend taking some profits.”
Meanwhile, BNP Paribas has dumped some Hong Kong-listed Chinese shares on concerns about the rising mainland margin debt and growing disparity between the equities and economic fundamentals.
“When a market goes crazy like this, no other topic becomes interesting,” Arthur Kwong, the head of Asia Pacific equities at BNP, said. “That’s a big negative signal — it’s as if nothing else is important. That makes me paranoid.”
The Chinese economy expanded at its slowest pace since 2009 over the first quarter as data from manufacturing, industrial output and exports all missed estimates.
Nevertheless, Chinese equity bulls remain optimistic as the market remains attractively valued, compared to other markets. For instance, FXI shows a 12.5 price-to-earnings ratio, GXC has a 12.8 P/E and MCHI has a 13.1 P/E.
iShares China Large-Cap ETF
For more information the Chinese markets, visit our China category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.