If China Stocks Rebound, This ETF Could Be a Leader

China stocks are heading toward an annual loss. That’s prompting many market observers to speculate that ominous streak will halt in 2024 with equities in the world’s second-largest economy rebounding from a lengthy funk.

Should that scenario materialize, it’d be positive for emerging markets investors. But owing to the sheer expanse of China’s financial markets, market participants need to be selective regarding how they access Chinese stocks. The  KraneShares Bosera MSCI China A Share ETF (KBA) could be one of the more rewarding funds in 2024. That’s assuming Chinese stocks prove resurgent.

KBA, which turns 10 years old in March, follows the MSCI China A 50 Connect Index. That gauge is home to Shanghai- and Shenzhen-listed stocks available to foreign investors through the Stock Connect program. Said another way, KBA holdings are colloquially known as A-shares. That could prove positive for investors in 2024.

KBA, A-Shares Could Be 2024 China Winners

As noted above, China’s financial markets are massive in scope. That size implies investors need to be aware of important differences among the various listing venues for equities. And that includes differences between A-shares — KBA’s holdings — and H-shares or those stocks trading in Hong Kong.

For example, Goldman Sachs is bullish on A- and H-shares for 2024. But the bank expects the former to outpace the latter next year. That thesis could solidify the case for KBA over H-shares-heavy rivals. Favorable monetary policy could be among the factors that support upside for KBA next year.

“We think the policy put has been exercised across the key policy cohorts, when it comes to monetary easing, fiscal policy stimulus, property market relaxation and quite importantly, the deregulation, in the industry tightening of the last few years,” said Kinger Lau, Goldman Sachs chief China equity strategist, in a recent CNBC interview.

Other factors could bode well for KBA. Those factors include that Chinese stocks are inexpensive relative to equivalents in other major markets and that professional investors are currently significantly underweight the asset class. That could indicate that if Chinese equities rebound, the “smart” money could be compelled to rapidly add to China positions.

“Consensus earnings estimates look optimistic for 2024 and 2025. But an arguably bearish policy and/or geopolitical outlook is embedded in the suppressed valuations, pointing to a right-skewed return distribution if these concerns subsides,” added Goldman Sachs.

At the sector level in China, Goldman is bullish on consumer staples and tech stocks. Those combine for over 30% of the KBA roster.

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