This has been a trying year for investors with exposure to Chinese equities. As of November 21, 2024, the widely followed MSCI China Index was down 7.6% year-to-date while the MSCI Emerging Markets Index was higher by 5.3%.
Further highlighting the struggles of Chinese stocks are the points that investors could have done significantly better by allocating to American or Indian stocks, as just two examples, or both. Other large developing economies, including Brazil and Taiwan, have also generated notable upside as Chinese stocks have scuffled.
As it pertains to Chinese equities and the related exchange traded funds today, perhaps the best news is that 2023 is drawing to a close and some market observers are making the case that 2024 will be better for China’s financial markets. Should that thesis prove accurate, ETFs such as the WisdomTree China ex-State-Owned Enterprises Fund (CXSE) should benefit.
CXSE, which follows the WisdomTree China ex-State-Owned Enterprises Index, has struggled this year as Chinese growth stocks fell out of favor, but that could shift for the better in 2024 if a more sanguine environment for Chinese assets emerges.
Catalysts for CXSE in 2024
Amid defaults in China’s property sector, geopolitical tensions with the West, and fears of a heavy-handed approach to private enterprise by Beijing, some market participants felt as though China became un-investable this year. On the other hand, some factors could augur well for CXSE in the new year.
“Western businesses have continued to invest in their China operations, Chinese policymakers have invested more in China’s economic growth, and the Biden administration has invested in its relationship with China’s leadership,” according to Charles Schwab research.
Potentially adding to the appeal of CXSE in 2024 are incremental signs that the longstanding coolness between the U.S. and China is warming. That’s critical ahead of national elections in Taiwan in just two months and in the U.S. next November.
China and the U.S. investing in more congenial ties “took the form of high-level meetings between officials of the two countries this summer, leading up to a face-to-face meeting between Presidents Biden and Xi (earlier this month),” added Schwab. “The recent resumption of functional, even if not friendly, U.S.-China contacts has helped alleviate some of the near-term geopolitical worries heading into 2024.”
Specific to CXSE, there’s a clear catalyst that could come into play next year. Chinese consumer confidence is at historic lows, implying there’s nowhere to go but up. Should that happen, ETFs that are consumer sector-heavy should benefit. With a 33% allocation to consumer cyclical stocks, CXSE fits that bill.
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