Chinese stocks and related exchange traded funds have plunged into a bear market. However, for the more intrepid investor, the recent selling may have opened up a good buying opportunity.
ETF investors who are interested in the Chinese market 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). Since their April highs, the China ETFs have fallen a little over 20%.
Additionally, investors can take a look at China A-shares ETFs that track mainland Chinese stocks traded in Shanghai and Shenzhen, including the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR), KraneShares Bosera MSCI China A ETF (NYSEArca: KBA) and Market Vectors ChinaAMC A-Share ETF (NYSEArca: PEK). The A-shares ETFs have seen an ever steeper sell-off, falling off about 30% since their June highs.
Now, Kinger Lau, a strategist for the Goldman Sachs Group, believes that the large-cap CSI 300 Index, the underlying index of ASHR, could rally 27% over the next 12 months once government measures and easing monetary policies begin to show an affect on the economy, reports Cindy Wang for Bloomberg.
Despite heavy outflows and a number of bubble warnings from international observers, Goldman Sachs remains bullish on China’s outlook, pointing to the potential success of Beijing’s efforts to support the market.
“It’s not in a bubble yet,” Lau told Bloomberg. “China’s government has a lot of tools to support the market.”
Lau argues that the Chinese government still has more bullets left to fire if the situation deteriorates. So far, policy makers have suspended initial public offerings, relaxed margin trading rules, diminished transaction fees and directed state-run institutions to maintain or add domestic equities positions – a group of 21 brokerages recently crated a 120 billion yuan, or $19.3 billion, market support fund.
Looking ahead, the Goldman strategists projects further monetary easing, even after four rate cuts since November and reduced reserve requirements for banks.
Nevertheless, Lau warned that small-cap Chinese stocks may still be overvalued.
For instance, the Market Vectors ChinaAMC SME-ChiNext ETF (NYSEArca: CNXT) has a 40.3 price-to-earnings ratio and Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap Fund (NYSEArca: ASHS) is trading at a 43.2 P/E ratio. Meanwhile, the Russell 2000 Index shows a 20.2 P/E ratio.
On the other hand, Lau favors larger Chinese companies, pointing out that the CSI 300 is heavier on low-priced financial stocks, which are trading at 17 times earnings, compared to 40 times back in 2007. ASHR, which tracks the CSI 300, includes a hefty 40.2% tilt toward the financial sector and has a 17.2 P/E.
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