Single-country exchange traded funds tracking Chinese stocks, including the iShares China Large-Cap ETF (NYSEArca: FXI) and the iShares MSCI China ETF (NYSEArca: MCHI), are among the better-performing emerging markets ETFs this year, but with Chinese stocks having rallied in a short amount of time, some market observers are urging investors to be selective with this asset class.
Chinese markets and country-specific ETFs surged Monday after President Donald Trump pushed off the tariff deadline, pointing to progress in the trade talks with China and announcing a “signing summit” with Chinese President Xi Jinping.
Investors appear to be embracing the ideas that the dollar will weaken this year and that the Federal Reserve will slow its pace of interest rate hikes or that no rate increases at all will be delivered in 2019. China’s efforts to stimulate its massive economy also make the case for considering the country’s equity markets.
Some of the factors that hindered Chinese stocks last year are turning for the better.
“Chinese monetary stimulus is arriving, hopes are running high for a trade deal and the Fed has hit the pause button. Yet A-shares still trade at a hefty discount to other emerging market (EM) equities, and to their own history. This suggests potential for further gains,” said BlackRock in a recent note.
The iShares MSCI China A ETF (CBOE: CNYA) is among the ETFs investors can use to access A-Shares.
Trade Progress
Trump was very optimistic in the direction of the talks, hinting that at the prospect of a summit “to conclude an agreement” with China’s Xi should progress continue.
Looking beyond the short-term volatility surrounding the trade talks, investors may find a long-term opportunity in Chinese markets.
“We see three drivers of the turnaround in China A-shares after a tough 2018. First, international flows into A-shares have accelerated amid improving sentiment toward China–and EMs more broadly,” according to BlackRock.
Catalysts remain that could send A-shares and ETFs such as CNYA higher as 2019 moves along.
“We see these drivers persisting in the near term and remain positive on the A-share equity market. Global investor positioning in China is still light. Official data suggest international investors hold only 3% of A-shares, and we could see this figure increasing,” according to BlackRock. “An upcoming change by index provider MSCI could quadruple the weighting of A-shares in its EM equity index to nearly 3% from 0.7%. Finally, valuations are still attractive, though a large unwind of negative sentiment means the value isn’t as big as it was in late 2018.”
For more information on the Chinese markets, visit our China category.