ETFs
Is it time for Chinese ETFs? – June 7, 2024
In recent years, investing in Chinese stocks has proven extremely difficult for bullish investors. Government policies perceived as anti-growth, repression of several sectors, strict measures linked to COVID-19 and the crisis in the real estate sector have contributed to a lull in the market.
iShares MSCI China ETF (MCHI – Free report) And iShares China Large Cap ETF (FXI – Free report) have decreased by 21.2% and 34% over the past five years. The ailing real estate sector poses the main challenge for the Chinese economy. Evergrande, previously the world’s largest real estate company, collapsed during China’s real estate market crisis.
GDP growth forecast rising
The Chinese economy is expected to grow 5% this year, after a “solid” first quarter, the International Monetary Fund announced recently, raising its previous forecast of 4.6% expansion, while expecting a slowdown in growth in the years to come.
BNP Paribas also recently expected China to meet its 5% growth target, while Goldman Sachs last month raised its 2024 forecast to 5%, from 4.8% in November. Citi also raised its own forecast to 5%, from 4.6% in March. All highlighted the strong first quarter data, cited by Reuters.
China’s exports for May beat analysts’ expectations despite trade tensions, although imports declined. Exports climbed 7.6% year-on-year in May, growing at the fastest pace since April 2023mainly due to ease of purchase and a lower real effective exchange rate.
Easy money policy
At its latest meeting, China’s central bank left its key interest rate unchanged and continued to drain liquidity from its banking system to support a struggling economy. In February, the Chinese central bank announced that it had reduced the prime rate on its 5-year loans while leaving its 1-year rate unchanged.
Cheaper rating
ETFs like FXI,Franklin FTSE China ETF (FLCH – Free report) and MCHI trade at a P/E of 16.63X, 18.98X, and 19.01X, respectively, well below SPDR S&P 500 ETF Trust (TO SPY – Free report) of 31.99X.
Ongoing corporate fundraising activities
Chinese companies are taking advantage of the resurgence of equity markets to obtain financing. The use of convertible bonds has increased, providing companies with an advantageous way to raise funds without immediate stock dilution.
Chinese technology leaders like Ali Baba (BABA – Free report) , Tencent Holdings (TCEHY – Free report) , And JD.com (JD) have each announced billions in buybacks in recent months. Buybacks are a bullish catalyst for these stocks because they boost investor confidence.
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