China Is Controversial, But a Still Important Portfolio Piece | ETF Trends

Chinese assets are currently controversial and risky against the backdrop of the COVID-19 outbreak, but the KraneShares Bosera MSCI China A ETF (NYSEArca: KBA), one of the largest US-listed ETFs with exposures to the stocks trading on Mainland China, may one of the China ETFs investors don’t want to overlook when the coronavirus situation abates.

Looking ahead, China’s stability-obsessed leaders could further add on more spending, tax relief and subsidies for virus-hit sectors, along with the further monetary easing to push for more bank lending and lower borrowing costs for businesses, according to the policy insiders.

“While the coronavirus dominates headlines, it is easy to forget that 2019 was a massive year for China’s A-share market,” said KraneShares in a recent note. “Last year, global index provider MSCI, increased the inclusion factor of China A-shares in their Emerging Markets Index to 20%, a move that exceeded expectations and elevated the market from being a ‘good option’ to an essential piece of the Emerging Markets (EM) puzzle.”

Near-Term Jitters, Long-Term Promise

China’s economy has been ground to a halt as the Lunar New Year holiday has been extended by 10 days in many industrial areas of the emerging country, with Beijing suggesting companies to hold off normal operations. Meanwhile, transportation networks have cut down to spread the disease.

That’s a relevant long-term concern, but KBA is still levered to significant long-term potential.

“MSCI’s inclusion announcement changed the way investors look at and think about the A-share market,” according to KraneShares. “The weight of A-shares in the MSCI China Index may grow from 11% to 40%, which would reflect the A-share portion of China’s full market cap, as measured by the MSCI China All Shares Index. In the MSCI Emerging Markets Index, MSCI’s projections indicate that China’s A-share weight will increase from 4% to 17%.”

Policymakers are stepping up to support the Chinese economy. Amid the coronavirus outbreak, the People’s Bank of China cut the one-year loan prime rate from 4.15% to 4.05%, and the five-year rate from 4.80% to 4.75%, making it the first cut since October last year, according to Refinitiv data. The move to cut rates was highly anticipated by analysts, especially amid the coronavirus outbreak.

Related: China ETFs Surge as Central Bank Throws Out Accommodative Measures 

Additionally, investors should note that headlines may not often reveal a market’s entire story.

“We believe it is prudent to note the disparity between how well A-share markets performed last year compared to how negative US media headlines were toward the market,” notes KraneShares. “We believe this disparity is still occurring now as the coronavirus dominates the news cycle. While it is impossible to tell what the virus’s actual impact will be and precisely when it will subside, English-language headlines still do not necessarily correlate with A-share performance.”

For more on core investing strategies, visit our Core ETF Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.