Following disappointing showings in 2023, China stocks are commanding attention as emerging markets rebound candidates in 2024. Professional investors are expecting an equity market recovery in the world’s second-largest economy could be broad-based.
That prognostication could prove accurate. But selectivity remains a critical element to success when it comes to accessing China. Among exchange traded funds, the WisdomTree China ex-State-Owned Enterprises Fund (CXSE) stands as an avenue through which investors can exercise selectivity while capturing exposure to potential sources of leadership should Chinese stocks live up to rebound billing next year.
The $521.3 million CXSE eschews exposure to Chinese state-owned enterprises (SOEs). That’s a pertinent trait on multiple levels. First, while shares of some China-based SOEs have recently shown signs of life, it’s an asset class that often lags broader emerging markets benchmarks. Second, most SOEs are classified as value stocks. But market observers believe that if Chinese stocks bounce back in 2024, it will be growth equities driving the resurgence.
Secular Opportunities Could Boost China ETF CXSE
One of the pieces in the China rebound puzzle is the notion that the bulk of the macroeconomic negativity faced by China is likely already priced into the country’s equity markets. That could set the stage for secular opportunities in 2024, some which CXSE is levered to.
“Firstly, policymakers are taking steps to stabilize and smooth out the slowdown. And, even as China’s expansion moderates, the growth rate is still projected to outpace that of the global economy over the next five years,” noted UBS Asset Management. “China has the potential to excel, with multiple industries and companies showing remarkable innovation and growth.”
Adding to the allure of CXSE are attractive earnings multiples. The fund is growth-stock heavy. But many Chinese communication services and consumer internet names aren’t as richly valued as U.S. equivalents. Plus, the Chinese equity market at large is currently inexpensive.
“Valuations are inexpensive relative to other emerging market peers. China is trading at a 12-month forward price[1]to-earnings ratio of 9.8, a significant discount to the MSCI World Index, as of November 1, 2023. We anticipate domestic households’ asset allocation will shift towards publicly traded equities over time, as is typically the case when economies mature,” added UBS.
The behavior of Chinese households is pertinent to investors considering CXSE. That’s because more equity market participants could propel the ETF’s holdings. It’s also also because the fund allocates nearly 34% of its weight to consumer discretionary stocks.
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