The world is celebrating the start of a new lunar calendar, traditionally a time to look forward to prosperity in the year ahead.
Could the Year of the Ox signal a bull market for China ETFs?
For China-focused ETF investors, the year of the Ox could coincide with a strong bull market as the country’s economy returns to muscular growth.
Peter Sleep, Senior Investment Manager at UK-based Seven Investment Management (7IM), said: “When it comes to investing in China, we all hope that the upcoming year of the Ox will be as strong and steady as the animal it represents.
“With China on the road to recovery going into the Chinese New Year, there are opportunities, either in equities or bonds, to access this diverse market and its huge growth potential.”
According to data from the US National Bureau of Statistics, China was the only major economy to expand in 2020, growing by 2.3%, while other countries’ economies were devastated by Covid-19’s economic destruction.
The UK economy, in comparison, contracted by 9.9%, its worst showing since the Great Frost of 1709.
And while many countries are still struggling to find their footing, China’s growth story is bullocking back to life. The country posted year-on-year growth of 3.2%, 4.9%, and 6.5% in the second, third, and final quarters of the year.
Part of China’s success has been attributed to its focus on restarting manufacturing activity as soon as it had turned the tide against Covid. In April, just as most of the world was shutting down its factories, China was able to obtain a strategic advantage by producing and exporting in-demand goods such as protective medical equipment and work-from-home necessities.
According to Zhixiao Wu, Chief Economist at Hong Kong-headquartered investment manager and ETF issuer China Post Global, the impressive rebound is not a flash in the pan.
“Various data confirms that China’s growth momentum is being sustained on both the production and demand side, and global growth momentum is expected to pick up after the introduction of a Covid-19 vaccine,” said Wu. “One key indicator that policymakers watch is the growth of fixed asset investment in the higher-end manufacturing sector, whose recovery was interrupted by the pandemic, but whose subsequent growth has been quite rapid. Another key indicator, employment, has overshot the policy target as well.”
According to China Post Global, which offers a suite of European-domiciled ETFs through its Market Access brand, further growth momentum may be achieved as consumer demand in China is still relatively weak compared to historic levels.
As such, China Post Global is most bullish on consumer-related sectors which it believes are poised for a boost as the economy continues to be opened up.
On the in-vogue technology, media, and telecom (TMT) companies, China Post Global issues caution. It notes that, while these firms are still favoured by Chinese government policy, they may come under pressure if economic growth is not as remarkable as their stretched valuations suggest. In the same vein, China Post Global also notes that the healthcare sector is likely to remain expensive.
According to China Post Global, investors in China should also be aware of the expectation that monetary policy from the People’s Bank of China may not be as supportive as it has been in the past. The combination of buoyant growth expectations and a gradually tightening monetary policy stance suggest a low volatility portfolio of China A shares may be prudent, says the firm.
Investors looking to adopt this approach may wish to consider the Market Access Stoxx China A Minimum Variance Index UCITS ETF which provides exposure to China’s onshore stock markets while targeting lower total volatility than the market itself.
The fund tracks the Stoxx China A 900 Minimum Variance Unconstrained AM (Accessible Market) Index which comprises Chinese A-shares while implementing an optimized minimum variance approach where eligible stocks are selected and weighted so as to reduce portfolio risk. Sector weights are unconstrained, meaning the index can deliver a purer minimum variance strategy with lower volatility compared to indices that have to maintain similar sector exposures relative to the parent index.
As of the end of January, well over one-third (37.6%) of the index was allocated to consumer non-cyclical stocks with significant weight also in the utilities (17.1%), financial (15.0%), industrial (11.7%), and energy (10.5%) sectors.
The fund comes with an expense ratio of 0.45% and is listed on London Stock Exchange in pound sterling (M9SV LN), on Xetra in euros (M9SV GY), and on SIX Swiss Exchange in Swiss francs (M9SV SW).
Investors preferring broad, traditional beta exposure to China’s equity market have several ETFs to choose from in Europe. 7IM’s Peter Sleep highlights the Xtrackers MSCI China UCITS ETF which tracks the MSCI China Index, covering over 700 stocks listed in Shanghai, Shenzhen or Hong Kong. The fund costs 0.65% and is listed on LSE (XCS6 LN; XCX6 LN), Xetra (XCS6 GY), Borsa Italiana (XCS6 IM), and SIX (XMCH SW).
“A straight play on China’s stock market, if the recovery takes hold in China this will provide a way to play that recovery via its stock market,” said Sleep.
Sleep also notes that China’s bond markets offer an attractive proposition.
“For the more cautious investor, the iShares China CHY Bond ETF offers exposure to an index of Chinese government bonds and bonds issued by the state-backed banks. Last year this delivered a return of nearly 10%, and as the country’s economy and finances recover, these types of bonds could look particularly attractive in a world of low yields.”
The iShares China CHY Bond UCITS ETF tracks the Bloomberg Barclays China Treasury + Policy Bank Index which reflects the performance of fixed-rate RMB-denominated treasury bonds and policy bank bonds listed on the China inter-bank bond market. Eligible securities must be rated investment grade and have a minimum of one year to maturity.
The fund has an expense ratio of 0.35% and is available on LSE (CNYB LN), Xetra (ICGB GY), Euronext Amsterdam (CNYB NA), Borsa Italiana (CNYB IM), and SIX (CNYB SW).