With the Federal Reserve holding back its interest-rate-hike trigger finger and an improved earnings outlook, emerging market traders have regained their risk appetite, bolstering Chinese stocks and country-specific exchange traded funds.
The Market Vectors ChinaAMC SME-ChiNext ETF (NYSEArca: CNXT) and Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap Fund (NYSEArca: ASHS) led gains Wednesday, jumping 4.4% and 4.5%, respectively. The China A-shares ETFs track more middle capitalization-weighted companies. Nevertheless, CNXT is still down 19.7% and ASHS is 19.1% lower year-to-date.
Meanwhile, the db X-trackers Harvest CSI 300 China A-Shares Fund (NYSEArca: ASHR), the largest China A-shares-related ETF, rose 3.8% Wednesday while the Market Vectors ChinaAMC A-Share ETF (NYSEArca: PEK) advanced 2.9%. Year-to-date, ASHR fell 14.6% and PEK declined 14.7%.
Chinese equities are experiencing their best rally in four weeks after Bank of Communications Co. and China Petroleum & Chemical Corp released better-than-expected earnings and fears of capital flight eased after the yuan currency strengthened and the Federal Reserve’s Chair Janet Yellen pushed off an interest rate hike, reports Kyoungwha Kim for Bloomberg.
China International Capital Corp., which raised its 2016 profit forecasts this week, believes the outlook on earnings growth is improving as the country shows signs of stabilizing. A recent report revealed industrial profits increased 4.8% in the first two months of the year. Traders will also be watching for manufacturing data Friday.
Deutsche Bank AG strategists led by Yuliang Chang also argued that the stronger industrial profit growth was an “encouraging sign” as A- and H-share non-financial earnings may improve in the first quarter on their high correlation to industrial data.
[related_stories]The small capitalization-weighted China A-shares ETFs include heavier tilts toward the industrial sector and smaller positions in financials. Specifically, CNXT includes 16.0% industrials and 6.7% financials, and ASHS holds 21.9% industrials and 8.7% financials. In contrast, ASHR has 41.1% financials and 15.6% industrials, and PEK has 40.9% financial and 15.0% industrials.
Additionally, Yellen said the U.S. central bank will “proceed cautiously” in raising rates Wednesday, further fueling risk-on sentiment.
“Many investors have been haunted by looming U.S. rate hikes, which is like a sword hanging over the head,” Wu Kan, head of equity trading at investment firm Shanshan Finance, told Reuters. “Yellen’s remarks gave investors some breathing space, and improved risk appetite.”
Moreover, the Fed’s dovish stance gives the Beijing more room to implement looser monetary policies without fear of the U.S. dollar appreciating too much against the yuan.
“A delay in U.S. rate hikes will also give China’s central bank more leeway to loosen its monetary policy and spur hopes for further cuts in rates and banks’ reserve requirements,” Zhang Gang, a strategist at Central China Securities Co., told Bloomberg.
Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap Fund