For the month ending June 12, the MSCI China Index shed 5.90% — a pullback Goldman Sachs described as healthy. Retrenchments throughout rebounds – the current state of affairs for Chinese stocks – are normal. And if they don’t cut too deeply, those retreats can offer opportunities. That could prove true with exchange traded funds including the KraneShares CSI China Internet ETF (KWEB).
As is the case with broader China equity gauges, KWEB traded lower over the past month, but those declines could be creating buying opportunities among some of the ETF’s holdings.
Of note is the point that in the eyes of some market observers, the number of KWEB components, including those commanding significant weights in the ETF, that are now looking buyable is large enough that if a few or all of those names rebound, the KraneShares fund could be in for a rally of its own.
KWEB Has the Makings of a Rebound Story
Tencent Holdings (TCEHY), PDD Holdings (PDD), and Trip.com (TCOM) are among the KWEB holdings that are catching the eyes of some traders and technicians. Those are three of the ETF’s top five holdings, combining for approximately 24% of the fund’s portfolio.
Specific to Trip.com, which is KWEB’s fifth-largest holding, that stock could be primed for more upside as more Chinese consumers lean into experiences, such as travel, over goods.
“Trip.com is a China-based online travel site operator. It’s benefitted from a travel boom after China’s long Covid restrictions were lifted in late 2022,” reported Investor’s Business Daily. “TCOM stock broke out past a cup base in late February on Q4 2023 earnings, then gapped out of a flat base, base-on-base pattern in early April. Shares hit a six-year high of 58 on May 20, but have pulled back to the 50-day and 10-week lines.”
While the experience-over-goods thesis supporting Trip.com is legitimate, it doesn’t imply that Chinese consumers are eschewing traditional discretionary shopping. Far from it. In fact, PDD’s Temu is an international shopping platform that’s highly popular in the U.S. It’s providing some support to a stock that commands 7.58% of the KWEB roster. Data confirm PDD is one of several growth stories calling KWEB home.
“Q1 2024 earnings shot up 185% and revenue 119%. It was the third straight quarter of accelerating earnings growth and the fifth consecutive quarter of faster sales growth,” according to IBD.
There’s another potential catalyst looming for KWEB and Chinese stocks. It comes in the form of the Chinese Communist Party’s (CCP) third plenum, which is scheduled for next month. At that widely anticipated conference, President Xi Jinping will discuss plans for steering the world’s second-largest economy forward.
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