As investors look for opportunities after the pullback, with some turning the emerging market countries like China, some may consider Chinese financial companies and related country-specific exchange traded funds for a more stable approach to the developing economy.
According to State Street Global Advisors, cheap valuations and a government that can easily bail out pockets of China’s financial sector from instability makes the country’s bank stocks a buy, Bloomberg reports.
Olivia Engel, chief investment officer of active quantitative equity at State Street Global Advisors, argued that Chinese banks provide return-on-equity levels as high as any other segment in the emerging markets.
“While investor sentiment is poor vis-à-vis Chinese banks, earnings forecasts are starting to turn upward,” Engel told Bloomberg. “The resulting valuation gap among Chinese banks – especially when viewed together with favorable quality attributes in this segment – presents a margin of safety for investors.”
For example, the Global X China Financials ETF (NYSEArca: CHIX), which provides broad exposure to companies in the Chinese financials sector, trades at a 7.7 price-to-earnings and a 0.9 price-to-book. In comparison, the S&P Financial Select Sector Index, which is comprised of S&P 500 financial companies, are trading at a 12.5 P/E and a 1.4 P/B.
“Valuations are even more favorable among Chinese banks, where fears of widespread instability in the banking system have so far failed to materialize,” Engel added.
ETF investors can also gain a more diversified exposure to Chinese markets through broad China country-specific ETFs, which also include heavy tilts toward state-owned banks and the financial sector. For example, the SPDR S&P China ETF (NYSEArca: GXC) includes a large 22.9% tilt toward financials and the iShares China Large-Cap ETF (NYSEArca: FXI) holds 46.6% in financials. Both of the funds include names like China Construction Bank, Industrial and Commercial Bank of China, and Ping An Insurance, among others, in their top holdings.
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