Looking to take advantage of the current uncertainty in the markets over the Middle Kingdom's continued policy on pandemic restrictions? We have selected funds that you could watch out for in the near term.
Current situation in China
After the introduction of the zero-Covid policy by China's Communist Party, it seemed that the Chinese economy might slow down significantly. The situation, which forced many citizens to stop doing their business, may have caused the people of the Middle Kingdom to start protests. As Reuters reports, "Police stopped and searched people at the sites of weekend protests in Shanghai and Beijing, after crowds there and in other Chinese cities demonstrated against stringent COVID-19 measures disrupting lives three years into the pandemic."
Now, following Saturday's announcement by Chinese authorities regarding the easing of months-long closures in various regions of the country in stages. Markets appear to be reacting particularly optimistically. Hong Kong's main index, the Hang Seng, is up more than 5% today.
How could you invest in China?
The characteristics of the Chinese stock market seem to limit the ability of an international investor to purchase assets in this market. For this reason, many entities originating from China are listed on multiple exchanges simultaneously.
The iShares MSCI Hong Kong ETF (EWH) is one of the funds giving exposure to the previously mentioned Hang Seng Index. It consists of 23.88% of Hong Kong-listed property companies. The second largest weighting is insurance companies (22.36%), followed by financials (11.79%) in third place. It appears that the currently tough property market in China, following the introduction of restrictions on developers' borrowing capacity, may be reducing the potential of this market. Nevertheless, the average price-to-earnings P/E ratio is around 13, which may speak to the undervaluation of this fund.
Source: Conotoxia MT5, EWH, Daily
We could get a glimpse of the broad market for Chinese equities with the iShares MSCI China ETF (MCHI), which has as much as 30.5% of its value in commercial property companies. In second place in terms of weighting is the communications sector (17.41%), and in the last place of the weighting podium is the finance sector (15.55%). As with the previous fund, it has significant exposure to one of the largest sectors of the Chinese economy, real estate. Interestingly, the largest position in the fund, accounting for, as much as 11.74%, is the technology giant Tencent (Tencent). The average price-to-earnings P/E ratio for this fund is just 9.88. This seems to be due to negative sentiment on the share prices of construction developers.
Source: Conotoxia MT5, MCHI, Weekly
The third fund already giving direct access to the Chinese A-share market is the iShares MSCI China A ETF. It appears to be the most sectorally diversified relative to its predecessors. Companies from the financial sector are the most heavily weighted, accounting for 17.37% of the fund's value. In second place, with a slightly lower weighting, are companies from the consumer goods sector (17.32%). The podium is rounded off by industrial companies (16%). On average, the price-to-earnings P/E ratio takes on a value of 14.35. Such a value could be considered well valued, giving these potentially smaller growth opportunities.
Source: Conotoxia MT5, CNYA, Daily
Knowing that many applications and websites are banned in the Middle Kingdom, we can access Chinese internet companies that provide similar services such as Google, Facebook, Twitter, eBay, Amazon, etc. Therefore, the latest passive fund to look out for is the KraneShares CSI China Internet ETF (KWEB). It is made up of 44 companies with 50% in the consumer goods sector, 36.24% in communication services and 4% in the real estate industry. The largest position is Alibaba Group Holding (Alibaba), which weighs in at 9.36% of the fund's value. It has an average P/E of 11.7, which, additionally taking into account the strongly growth-oriented nature of the fund's companies, seems to give signals for upside in the event of an easing of the pandemic tightening situation.
Source: Conotoxia MT5, KWEB, Daily
Grzegorz Dróżdż, Junior Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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