This Could Be an Epic Week for the China Internet ETF

In the U.S., first-quarter earnings season is in the books. However, there are still some reports to be delivered by big-name ex-US companies, including several from China. Over the next several days, several Chinese internet titans step into the earnings confessional.

That implies the KraneShares CSI China Internet ETF (KWEB) could be in the earnings-drive spotlight this week. For the month ending May 13, KWEB is higher by almost 20%. This is an impressive run that could be tested by a slew of important earnings updates from member firms over the next few days.

The tests could commence as soon as Tuesday, May 14 as Tencent (TCEHY) and Alibaba (BABA) deliver quarterly results. Those are KWEB’s two largest components with the stocks combining for over 19% of the portfolio. Those reports are followed by updates from (JD) and Baidu (BIDU) on Thursday. That pair of stocks combine for 7.77% of KWEB.

China Internet Earnings Could Make or Break Rebound

The earnings reports from the aforementioned KWEB holdings arrive as Chinese stocks are in the midst of an impressive rally. We have seen the MSCI China Index climb 17.36% over the past month. That resurgence implies growth. Internet stocks are leading that rebound as highlighted by KWEB outpacing the China benchmark over that span.

One way of looking at that scenario is that the upcoming earnings avalanche from KWEB member firms could make or break the near-term fortunes of the broader China rebound.

“The earnings scorecards come at a crucial time for the nation’s key stock gauges that recently entered a bull market but are still some 40%-to-60% below their highs set in early 2021. A key question is whether the rebound — driven in part by cheap valuations and a rotation away from Japan — is durable or will once again be punctured by disappointing results,” reported Henry Ren for Bloomberg.

The mention of Japan is pertinent because some recent data points indicate some professional investors have pared exposure to Japanese and U.S. stocks and funneled that cash to Chinese equities. In other words, Chinese companies need to deliver on the earnings front to foster more confidence among global investors. Some firms haven’t with notable earnings misses found among materials, real estate and utilities names.

Fortunately, those sectors aren’t represented in KWEB. Plus, the ETF’s holdings are, in aggregate, less expensive than U.S. counterparts while offering plenty of upside to earnings forecasts.

“There’s still room for optimism though as tech companies were some of the best performers last year in boosting profits. Forward earnings estimates for an MSCI Index of 100 Chinese tech firms climbed about 20% in 2023, even as forecasts declined for other industries,” according to Bloomberg.

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