Amid fears that the Chinese economy, the world’s second-largest, is showing signs of weakness, stocks there are pulling back. That’s ominous to be sure, but it doesn’t imply investors have the luxury of ignoring this mammoth economy over the long-term.
The opposite is true, and it’s possible that with Chinese equities and the related exchange traded funds currently sluggish, a buying opportunity could be emerging. Indeed, there are bargains abound in China and throughout the emerging markets complex, but investors should also exercise discretion. The KraneShares MSCI China ESG Leaders ETF (KESG) helps market participants accomplish that objective.
Currently, it’d be easy for investors to be downbeat about emerging markets, particularly China, but market leadership isn’t permanent. Plus, KESG’s environmental, social, and governance (ESG) leanings could offer a higher quality avenue for sticking with Chinese stocks over the long haul.
“The long tail of history tells us markets are cyclical; every investment has its days in the sun and days in the shade. And history would indicate the next decade could be very different,” notes Morningstar analyst Tyler Dann.
KESG Supported by Strong Fundamentals
Indeed, history confirms that there are lengthy periods in which emerging markets stocks outperform domestic rivals and vice versa. From 1988 through 1993, the emerging markets equities beat U.S. rivals by a margin of better than 4-to-1. Over the five years spanning 1994 to 1998, domestic stocks rallied thanks to the original internet bubble while developing world stocks stumbled.
From 1999 to 2007, emerging markets stocks surged 420% compared to a 38.1% for domestic fare, according to Morningstar. Over the past 15 years, U.S. stocks are thumping emerging rivals by a 25-to-1 margin. Point is market leadership can and does change.
“The structural story around emerging markets remains largely intact. Emerging markets represent 80% of the world’s population and nearly 70% of the world’s gross domestic product growth but only 11% of the total global equity market cap. There’s a compelling long-term investment story,” adds Dann.
Specific to KESG, the valuation case often mentioned in discussions about emerging markets equities is relevant to this ETF. So is the point that many Chinese companies are increasingly prioritizing ESG initiatives as avenues for appeasing Beijing and luring more global investors.
As it pertains to the “E” in ESG, China is on its own enviable trajectory of clean adoption while maintaining its status as a major exporter of components and materials needed to produce renewable energy products that are used the world over – two factors that could bode well for KESG over the long-term.
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