With stocks in developing economies resting at their highest levels in about three years, some investors are apt to ponder the fate of stocks in the largest emerging market – China. The iShares China Large-Cap ETF (NYSEArca: FXI), one of the largest China exchange traded funds listed in the U.S., is up almost 26% year-to-date.
Ongoing reforms, notably from the supply side, could further support Chinese economic growth. Reforms have bolstered industrial profitability and strengthened commodity prices. China’s exporters are also enjoying improvements from a rebound in global trade.
Investors are coming to grips with the fact that China’s economic growth is not what it was during the go-go days of the emerging markets boom. For an economy often deemed as too hot, steady, consistent growth could be what foreign investors really want to see.
The Chinese economy is also shifting towards domestic-oriented consumption as a main growth driver. Consequently, consumption-driven sectors liek technology and services are becoming a growing component in the economy.
“FXI has an average annual return of 8.62% since its inception. As China just been through a stock market crash in 2015, its average annual return in the past 3 and 5 years are only 4.78% and 5.82% respectively. However, its stock market appears to show some signs of recovery lately with a return of 18.91% in the past 1 year,” according to a Seeking Alpha analysis of FXI.
FXI is often criticized because it holds just 51 stocks and allocates 53% of its weight to financial services stocks, nearly five times its second-largest sector weight.
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Yuan weakness has been a point of contention for investors considering China, but that scenario could change for the better. The Chinese currency will strengthen when the yuan enters the International Monetary Fund’s basket of reserve currencies as it joins the dollar, euro, pound and yen. With the importance of the yuan growing as an alternative to the U.S. dollar, investment flows into China could help support Chinese markets and country-specific exchange traded funds.
“FXI is a great vehicle for investors to invest in the largest emerging market in the world. When compare to S&P500, FXI is relatively cheap. While this may imply the potential of higher return, investors need to be aware of the high volatility of Chinese markets and the risks associated. Investors should exercise caution and avoid chasing the market,” according to Seeking Alpha.
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