The case against investing in China ETFs goes a little something like this: The world’s second largest economy grew at its slowest level in 14 years at 7.7%. Local government debt has surged 67% since 2010. Meanwhile, home prices from Beijing to Shanghai have more than doubled over the last 10 years such that real estate is in danger of an imminent collapse.
Granted, the trends toward slower growth, higher debt levels and inflated home prices are troubling. Yet the Chinese government continues to manage the bruises and bumps associated with its emergence as a global economic superpower.
For example, in transitioning away from a “Made in China” dependency on exports, China is experiencing remarkable growth in consumption. The latest reading (111) on consumer confidence hit an all-time record. Additionally, early in 2013, China expressed determination to promote GDP above 7.5%. The economy grew at 7.7% last year.
Compare some of the statistics between the U.S. and China. Investors ignore deceleration in jobs and economic output when it occurs stateside, yet they fret when GDP in China slows from 7.8% to 7.7%. Retailers in America have been struggling to post positive sales numbers. In contrast, retail sales grew 13.6% in 2013 over on the mainland. Wage growth? Phenomenal in China. Wages in the U.S.? They have struggled to keep pace with the mildest cost of living increases.
On the surface, then, one might think that a fund like Global X China Consumer (CHIQ) could outperform SPDR Select Sector Consumer Discretionary (XLY) on a year-over-year basis. The exact opposite has turned out to be the reality.
The fact that China ETFs have had a remarkably difficult ride lately — the fact that investors have dismissed the China story as last decade’s phenomenon — is important for a trend-follower like myself. I may believe in the resilience of Asia. I may be swayed by attractive valuations of exchange-traded funds in the region. Nevertheless, I do not disregard the critical nature of technical price movement.
Until recently, the only China ETFs to reward investors for the risks being taken were tied to technology. The short list of technology-driven China ETFs includes: (a) PowerShares Golden Dragon Halter (PGJ), (b) Guggenheim China Technology (CQQQ) and (c) Global X China Technology (QQQC). In contrast, a broad-market China believer has been whipsawed more frequently than he/she dares to count.
On the flip side, the technical and fundamental pictures for funds like SPDR China (GXC) are clearly improving. Technically, each of the last three breaches of the 200-day moving average on the downside occurred at a higher price than its previous breach. What’s more, the dips below the “200-day” have been relatively short-lived.
Fundamentally, three years of futility places GXC’s forward P/E at 10, dividend yield at 2.4% and P/B at 1.5. Contrast that with the S&P 500’s SPDR Trust (SPY) with a forward P/E at 16, dividend yield at 1.8% and P/B at 2.5.
I am not suggesting that it is time for everyone to hop back aboard the Orient Express. At present, most of my clients do not have much in the way of exposure to emerging market equities. That said, I can see the forest for the trees; I am continuing to monitor the signs for the inevitable resurgence in appetite for market-based securities of Chinese corporations.
Perhaps the most intriguing possibility? DB X-Trackers Harvest CSI 300 China A Shares Fund (ASHR). This fund is the only U.S.-listed ETF that invests directly in China A-Shares — shares of companies incorporated on the mainland and trading on the Shenzhen and/or Shanghai exchanges. It is believed that ASHR provides more access to domestically focused companies than the internationally focused H-Shares found in SPDR China or iShares FTSE China 25 (FXI).
At the present, ASHR is demonstrating greater upside momentum than the competition.