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Invesco bucks the trend with the launch of Europe’s first ChiNext 50 ETF
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Invesco is launching the first European exchange-traded fund tracking China’s ChiNext 50 technology index, in a rare Western vote of confidence in the world’s second-largest economy.
The listing comes as closures of China-focused ETFs hit a record high, with investors and fund companies backing away after years of poor stock market performance and growing geopolitical friction that led some to question the ethics of investment in an increasingly authoritarian state.
Fund managers around the world closed 18 China ETFs in the first quarter of 2024, more than half of last year’s record total of 34 closures, according to Morningstar Direct data, with Global X, Xtrackers and KraneShares among those. who wield the axe.
The pace of launches has also slowed sharply, with only 33 China ETFs unveiled in the first quarter, all but three domiciled in China or Taiwan. That compares to 160 launches in calendar year 2023 and a record 291 at the height of China mania in 2021.
Poor performance has been a key driver of the sour sentiment, with China’s blue-chip CSI 300 index still 39% below its February 2021 peak – despite robust intervention from the “team national” of institutions supported by the state of Beijing, which invested 410 billion RMB ($56). billion) in domestic equity ETFs in the first two months of 2024 alone, according to UBS calculations.
Chris Mellor, head of Emea equity ETF product management at Invesco, disputed any notion that this meant Chinese share prices were being propped up at artificially high levels, arguing instead that they were now cheap.
“The multiples are only slightly above the low we saw in 2019, at 20 times forward earnings,” Mellor said. “They had exchanged up to 40 to 50 times in 2020/21. China seems cheap rather than expensive compared to other markets.
The Invesco ChiNext 50 Ucits ETF (CN50) will invest in 50 of the largest and most liquid securities among the 1,300 listed on the ChiNext market of the Shenzhen Stock Exchange in mainland China.
This gives it an innate sector bias: at launch, around 90 percent of its weighting will be invested in technology, industrials, healthcare and financial stocks, Mellor said, with no exposure to real estate, energy, services public or consumer values.
The top stocks at launch will be Contemporary Amperex Technology Co (CATL), the world’s largest maker of electric vehicle batteries, followed by Shenzhen Mindray Bio-Medical Electronics and East Money Information.
“The ChiNext Board of Directors was launched in 2009 to encourage innovation,” Mellor said. “The fundamental story is one of growth. Each year, it has generated stronger profit growth than the Chinese market as a whole.
“R&D expenses as a proportion of operating revenues average 6 to 7 percent. For the CSI 300 average, it is less than 2 percent,” he added.
Despite this, performance was poor. The ChiNext 50 index has risen 33 percent since its launch in June 2014 (below 65 percent of the CSI 300 over the same period) and even peaked as early as June 2015, since then it has fallen 55 percent . By comparison, Wall Street’s S&P 500 index is up 180 percent over the past decade.
Mellor, however, remained optimistic.
“Market performance has been particularly painful for investors who have persevered. The situation is expected to reverse and return to normal. Markets go through cycles,” added Mellor, who believed the beginning global cycle of rate cuts could help propel a recovery.
“We view product development as a long-term game. China has been out of favor for some time, but that doesn’t necessarily mean it will stay out of favor in the future.”
Others might question the ethics of investing in a Chinese fund focused largely on artificial intelligence, electric vehicles, renewable energy, robotics, automation and biotechnology.
In December, for example, US power company Duke Energy disconnected CATL-made batteries at a US Navy base camp, under pressure from politicians fearing national security threats from their government ties. Chinese. CATL has denied these accusations.
Mellor said such questions were “a decision the fund’s investors must make”, but stressed that China was “still part of the investment universe” and was a significant weighting in emerging markets funds.
Kenneth Lamont, senior fund analyst for passive strategies at Morningstar, called the ETF launch “a little strange,” adding “it’s not even the best idea.” [for an index].
“It’s 50 shares. We do not look favorably on equivalents, for example the Euro Stoxx 50, as an investment proposition. They are very concentrated on a small number of important stocks.
However, Lamont thought the timing was potentially interesting.
“The history of China has been very negative for some time now. In a way, it makes sense as an investor to buy things that are no longer in fashion. That’s just not how it works, launching after the hype cycle,” he said.
“It is rare for large players to launch products in unfavorable markets. »
Invesco currently has four China-focused ETFs, although their combined assets are only $119 million.
The new ETF, launched as part of a collaboration with Great Wall Securities, its Chinese joint venture partner, will be listed on the London, Milan, Frankfurt and Zurich stock exchanges with an annual management fee of 0.49 percent.