The U.S.-China trade war has battered Chinese stocks, but high-level government talks expected to take place in early October could breathe some life into their shares.
Over the past 14 months, market sentiment about a potential trade deal has fluctuated between optimism to pessimism, amid tough talk between leaders of the two countries and tit-for-tat tariffs.
For tactical or long-term investors, however, the volatility in Chinese equities can be a buying opportunity. China’s economic growth rate slowed to 6.2 per cent in the second quarter, but it’s still an enviable rate among industrialized countries, and more stimulus policies by the government could help shore up growth.
Because exchange-traded funds [ETFs] are an easy way to bet on rebounding Chinese stocks, we asked three experts for their top picks.
Daniel Straus, vice-president, ETFs and financial products research, National Bank Financial Inc.
The pick: WisdomTree ICBCCS S&P China 500 ETF (CHNA.B-TSX)
This Canadian-listed ETF is attractive because it invests in 500 of China’s largest companies trading on the mainland or offshore exchanges, Mr. Straus says. Tencent Holdings Ltd., Alibaba Group Holdings Ltd. and China Mobile Ltd. are top holdings. The ETF’s fee, which is expected to be about 0.62 per cent, is the cheapest among China ETFs trading in Canada, he says. The caveat is that this fund is just more than a year old and thinly traded. “We do see pretty wide bid-ask spreads, so investors should trade carefully with limit orders,” Mr. Straus says. The ETF is suitable for investors that are bullish on China, but don’t own an emerging-markets fund where they already have exposure. Despite optimism about a trade deal before the next U.S. election, there is still a risk it won’t happen, he says.
The pick: Global X MSCI China Consumer Staples ETF (CHIS-NYSE)
This China-sector ETF should benefit from China’s goal to become a consumer-driven rather than export-led economy, Mr. Straus says. The fund would appeal to investors, who feel that it’s best to focus on companies benefiting from domestic consumption in case the trade war becomes protracted. China Resources (Holdings) Co. Ltd., Kweichow Moutai Co. Ltd., China Mengniu Dairy Co. and Tsingtao Brewery Co. Ltd. are among the top holdings. The risk for this ETF stems from being highly concentrated in a single sector, but the fund “has been doing very, very well,” Mr. Straus says. However, he says it’s still hard to say what impact a recession could have on Chinese consumer-staples companies. The ETF’s 0.65-per-cent fee is reasonable for a China sector fund, Mr. Straus says.
David Kletz, vice-president and portfolio manager, Forstrong Global Asset Management Inc.
The pick: KraneShares Bosera MSCI China A Share ETF (KBA-NYSE)
This China-equity ETF should benefit from the country’s push for structural reform and transition to a consumer-led economy, Mr. Kletz says. Companies focused on new sectors, such as information technology and health care, should see their market value grow faster than old-economy peers, he says. China’s slowing growth should also improve from loosening monetary and fiscal policy. The ETF, which invests in China’s A-share market, owns names such as Kweichow Moutai Co. Ltd. and Jiangsu Hengrui Medicine Co. Ltd. While Forstrong is skeptical about a comprehensive U.S.-China trade deal, investor sentiment should get a lift if sanctions against hardware giant Huawei Technologies Co. were scaled back. Mr. Kletz says the ETF’s 0.60-per-cent fee is in line with peers.
The pick: MSCI China Consumer Discretionary ETF (CHIQ-NYSE)
This fund should benefit from China’s rapidly growing middle class because it’s a play on consumer discretionary purchases, Mr. Kletz says. Instead of focusing on food and shelter, household spending will expand to other areas, such as autos and entertainment. Mobile payment methods are increasingly popular in China and that has helped the country become the world’s largest e-commerce market, Mr. Kletz says. Alibaba Group Holding Ltd. and JD.com Inc. are among the ETF’s top holdings. He believes the internet- and direct-market-retailing sector, which makes up 33 per cent of the ETF, has been unduly hurt by the trade war and could rebound with the easing of tensions. However, the ETF’s heightened valuation multiple against its historical median is also a risk. He says the ETF’s 0.65-per-cent fee is competitive with other Chinese-sector ETFs.
Edmund Fernandez, ETF and mutual fund analyst, Industrial Alliance Securities Inc.
The pick: KraneShares CSI China Internet ETF (KWEB-NYSE)
This ETF, which tracks China-based internet-related companies, provides access to one of the country’s fastest-growing industries, which should benefit from the country’s emerging middle class, Mr. Fernandez says. The ETF’s Hong Kong- or U.S.-listed holdings include Tencent Holdings Ltd., Alibaba Group Holding Ltd. and Baidu Inc. Given the importance of global trade to e-commerce, a deal between the United States and China “would be immensely important to the majority of the businesses represented in the portfolio,” Mr. Fernandez says. “Chinese retailing, in general, faces uncertainty from the trade war with the increased costs of U.S. imports.” Further protraction of the dispute is a risk to this fund, he says. The fund’s 0.76-per-cent fee is comparable to other China sector ETFs.
The pick: Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR-NYSE)
This fund, which invests in the 300 largest stocks in China’s onshore A-share market, offers broad exposure to the country’s long-term growth opportunities, Mr. Fernandez says. Those shares, which list on the Shanghai and Shenzhen stock exchanges, provide better diversification than the H-shares of Chinese companies listed in Hong Kong, he adds. Ping An Insurance Group Co. of China Ltd., Kweichow Moutai Co. Ltd., China Merchants Bank Co. Ltd. and Industrial Bank Co. Ltd. are among the ETF’s top holdings. Financials represent about 36 per cent of the fund. A U.S.-China trade agreement could help the financial sector, which has been facing pressure owing to concerns about an economic slowdown, Mr. Fernandez says. The fund’s 0.66-per-cent fee is in line with peers.