Nearly nine months into the year, China is teaching global investors some hard lessons in 2021. Primarily, when the Chinese Communist Party (CCP) wants to crack the regulatory whip, it can and will do so with force.
And it’s doing so this year, leading to tens of billions of dollars of evaporated market value for online tutoring companies and internet retailers, among others. As such, the MSCI China Index is lower by 17.45% year-to-date.
Pinpointing when the regulatory pressures will abate and when assets such as the WisdomTree China ex-State-Owned Enterprises Fund (CXSE) will become buys could prove to be futile, but the WisdomTree exchange traded fund shouldn’t be ignored outright.
For investors who want to position for a rebound by Chinese growth stocks without the full commitment of a dedicated China fund, the WisdomTree Emerging Markets ex-State-Owned Enterprises ETF (XSOE) could be worth considering. While XSOE is chock full of growth stocks, it’s not all that expensive.
“Despite headier growth prospects, the WisdomTree Fund trades for 21.1 times trailing earnings and 16.5 times forward earnings—a sharp discount to the 29.5 trailing and 22.2 multiples accorded the U.S. market. Meantime, the MSCI EAFE Index of developed equities is expected to have just 2.8% annual sales growth, yet its P/Es are 22.0 on trailing earnings and 16.1 on forward earning,” says Jeff Weniger, WisdomTree head of equity strategy.
Because it’s not a dedicated China ETF and due to the fact that some online retail names in other developing economies are performing admirably this year, XSOE is off just 5.24% — a far better showing than the MSCI China Index.
Of course, questions will linger regarding when Chinese stocks will get their respective acts together. When that happens, the aforementioned CXSE is positioned for success, though with slightly elevated multiples.
“Our pure play on China Fund is called the WisdomTree China ex-State-Owned Enterprises Fund (CXSE). Because of its nearly 20% weight to the Communication Services sector, its trailing P/E is 21.7 and its forward multiple is 20.8. Its approach has a very “future of China” feel to it, with top holdings including firms like Tencent (gaming, social media), Alibaba (e-commerce and fintech), Meituan (DoorDash-style delivery), JD.com (e-commerce), Wuxi Biologics (drugs), Baidu (Internet search) and Nio (electric vehicles),” according to Weniger.
The risk with CXSE is that regulatory headwinds will linger longer than expected. The reward is that when that situation improves, CXSE is among the most well-positioned ETFs for upside.
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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.
