With the coronavirus epidemic weighing on Chinese stocks, some investors are avoiding the world’s second-largest economy. On the other hand, some sector-level buying opportunities could be emerging, including bank stocks. That’s a group accessible via the Global X MSCI China Financials ETF (NYSEARCA: CHIX).
CHIX follows the MSCI China Financials 10/50 Index. That index provides exposure to large- and mid-cap Chinese financial services firms. The CHIX index “incorporates all eligible securities as per MSCI’s Global Investable Market Index Methodology, including China A, B, and H shares, Red chips, P chips, and foreign listings, among others,” according to Global X.
With CHIX, investors can access financial services sector growth at a discount relative to equivalent domestic ETFs. Due to previous fears about instability in the Chinese banking system, many of which have yet to materialize, banks in the world’s second-largest economy trade at depressed valuations relative to their U.S. counterparts.
“Financials is the largest sector in China, with roughly $4 in total market cap,” said Global X in a recent note. “It is a younger, yet sizably larger sector than its US counterpart, by both nominal market cap, market cap as a percentage of GDP, and total bank assets. Within the broad MSCI China Index, however, Financials is underrepresented as only the third-largest sector by weight due to various caps and inclusion factors – implying that investors allocating via broad index funds are underweight Financials relative to its true size.”
Check in on CHIX
CHIX holds 81 stocks, many of which are large, state-controlled Chinese banks as highlighted by an average market value of $47.77 billion for the fund’s components. In large part, loan growth in China is being driven by those usual suspects.
“While the original Big Four still dominate China’s financial system, the landscape is now more dynamic with public and private institutions, as well as state-owned enterprises (SOEs), playing important roles,” according to Global X. “As policy shifts to allow more market-driven growth, innovation arises – some positive, like the rise of mobile payments, and some negative, like the emergence of the shadow banking system.”
While domestic financial service stocks are considered value plays, CHIX may offer more value with better growth prospects.
“Investors unsatisfied with weak growth expectations and higher valuations in the US may find China Financials compelling. While China Financials has stronger projected sales growth versus the US, it is cheaper by price-to-earnings (P/E), price-to-sales (P/S), price-to-cash-flow (P/CF), price-to-book (P/B), and forward P/E and P/S metrics,” according to Global X.
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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.