With Chinese mainland A-shares surging this year, investors seeking exposure to the emerging market may be better off with China H-shares and related country-specific exchange traded funds.
“The H-share index is much more attractive versus the A-shares at the moment, and we’re positioned that way,” Helen Zhu, head of China equities at BlackRock , told CNBC.
ETF investors who are interested in the Chinese market also have a number of options to choose from. For instance, the iShares China Large-Cap ETF (NYSEArca: FXI) is the largest China-related ETF that tracks Chinese companies listed on the Hong Kong stock exchange. Similarly, other China H-shares ETFs options include the SPDR S&P China ETF (NYSEArca: GXC) and the iShares MSCI China ETF (NYSEArca: MCHI). [China ETF’s Moment in the Limelight]
The China H-shares ETFs still show relatively cheap valuations. FXI has a 11.77 price-to-earnings ratio and a 1.5 price-to-book. GXC has a 12.3 P/E and a 1.49 P/B. MCHI shows a 12.37 P/E and a 1.55 P/B.
In contrast, China A-shares ETFs that track mainland Chinese stocks traded in Shanghai and Shenzhen are trading at higher valuations after this year’s surge. For example, the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR) has a 16.97 P/E and a 2.38 P/B. The KraneShares Bosera MSCI China A ETF (NYSEArca: KBA) shows a 19.28 P/E and a 2.51 P/B. The Market Vectors ChinaAMC A-Share ETF (NYSEArca: PEK) has a 17.41 P/E and a 2.41 P/E.
BlackRock’s Zhu is also voicing concerns over the skyrocketing valuations on China’s onshore equity market. The Shanghai Composite Index and Shenzhen Stock Exchange Composite Index show a P/E ratio of 22 and 62, respectively, whereas the Hong Kong’s Hang Seng Index has a 12 P/E.
“There are warning signs that some pockets of the A-share market have become overheated,” Zhu said. By comparison, “Hong Kong-listed China shares are not at all expensive.”
The rally in Chinese equities could continue as the market is still “massively under-owned” by global asset allocators, Zhu added.
Many global asset managers are also waiting on MSCI’s decision Tuesday on including Chinese mainland stocks in its global indices. MSCI will announce its decision late Tuesday, 5pm Eastern Time, according to AsianInvestor. If MSCI adds A-shares to its benchmark Emerging Markets Index, it would force investors to hold more Chinese equities, which would increase demand and lift prices. [Waiting on MSCI, A-Shares ETFs Rally]
Zhu also expects the Shenzhen-Hong Kong Stock Connect program to bolster the H-shares market as mainland investors shift into cheaper Hong Kong-listed Chinese companies. Hong Kong stocks have increased 15% year-to-date, whereas Shanghai and Shenzhen stocks surged 57% and 110%, respectively.
“We would expect to see more [mainland]domestic liquidity flow into the Hong Kong market , ” Zhu said.
Moreover, Zhu favors H-share banks, property developers and small- and mid-sized companies.
ETF investors can also gain exposure to the bank and real estate sectors through the Global X China Financials ETF (NYSEArca: CHIX), which includes 47.8% banks and 21.7% real estate, and the Guggenheim China Real Estate ETF (NYSEArca: TAO), which tracks publicly traded companies and real estate investment trusts that derive the majority of their revenue from properties in China and Hong Kong.
The Guggenhiem China Small Cap ETF (NYSEArca: HAO) and iShares MSCI China Small Cap Index Fund (NYSEArca: ECNS) both focus on the smaller segment of the Chinese market. HAO includes 13.4% small-caps and 43.1% mid-caps. ECNS has a larger 34.5% tilt toward small-caps and 61.7% in mid-caps.
For more information on the Chinese markets, visit our China category.