Investors have been moving their money around in the first half of the month as hawkish sentiments from the Fed have many pivoting from growth to value equity stocks in an environment that is also putting increasing pressure on bonds. Dr. Xiaolin Chen, head of international at KraneShares, discusses three reasons why remaining invested in China’s growth stocks is the right play for 2022 in a recent video.
The first reason that Dr. Chen believes investors should stay engaged in growth stocks in China is because of the current price valuations of growth stocks, specifically within the Chinese internet sector. The internet sector is currently priced at 18x earnings and, compared to U.S. growth at 39x earnings, offers a deep discount for investors. KraneShares believes that the fundamentals of the internet companies are strong and that they offer a wide margin of performance catch-up for investors this year.
“In 2022, regulation clarity will help to compress left-tail valuation risks and facilitate the potential return to a strong, organic growth for the sector,” Dr. Chen explains.
A second reason to stay invested in China’s growth stocks is because policy makers are going to have to be more proactive this year to help meet the macro stressors and systemic risks. Dr. Chen anticipates that policy rates will remain low and that there will be an expansion with an infusion of liquidity to help small- and medium- sized businesses in the country.
“China tends to have idiosyncratic nature in policy making [compared to the rest of the world],” Dr. Chen says. “These eases may seem incremental but necessary, particularly ahead of key political events this year.”
The final reason that Dr. Chen believes it will be a potentially strong year for growth stocks in China is because of the stabilizing GDP. KraneShares has studied the correlation between equity performance and GDP growth in China and found that when GDP has accelerated, value stocks have typically outperformed. On the other hand, when GDP declined and normalized at a lower range than previously, growth stocks tended to outperform.
“Given our macro expectation is China to stabilize its GDP growth at around 5% from 2022, together with a supportive liquidity conditions domestically,” Dr. Chen explains that the combination could “bode well for growth premium expansion. This gives us the comfort to prefer growth-oriented equities in China for 2022.”
Investing in Chinese Growth Stocks With KBA
For investors looking for exposure to China’s economy and the A-shares market that continued to grow last year through the regulatory pressures and restructuring, the KraneShares Bosera MSCI China A Share ETF (KBA) invests in Chinese A-shares — specifically, the MSCI China A Share Index.
The ETF captures mid-cap and large-cap representation of Chinese equities listed on the Shenzhen and Shanghai Stock Exchanges, which have been historically closed to U.S. investors. At $738 million in assets under management, KBA remains the largest MSCI-linked China A-share ETF available in the U.S.
Holdings in KBA include Contemporary Amperex Technology, a Chinese battery manufacturer, at 8.16%; Kweichow Moutai, a major alcohol producer in China, at 7.82%; and Longi Green Energy Technology Co, a solar energy technology company, at 5.33%.
KBA carries an expense ratio of 0.56%.
For more news, information, and strategy, visit the China Insights Channel.