In recent weeks, I’ve advocated buying European stocks and REITs. I’m still wildly bullish on both, but today my attention is turning to emerging markets and specifically to China.
I first mentioned China about a month ago, noting that Chinese stocks were cheap and that they had quietly been outperforming the S&P 500.
Well, Chinese stocks are still cheap, fetching only seven times earnings by the Financial Times’ estimates. And though Chinese stocks have slumped over the past week, they are still outperforming the S&P 500 by a wide margin.
The general consensus is still pretty bearish on China. The feeling is that the country’s best days of growth are behind it. This is true, of course. China will probably never enjoy 10% annual GDP growth again. But its growth rate still puts all developed markets and most emerging markets to shame. And the recent data coming out of China is encouraging.
Earlier this week, I received an email from KraneShares, an advisor specializing in China-focused ETFs that laid out a few economic stats worth bullet pointing:
• Home prices for new residential properties in 66 of 70 mid and large cities rose on a monthly basis in August. For price movement, the largest increase was 1.7% and lowest was a fall of 0.1%. Compared to a year ago, 69 cities saw higher home prices, with the greatest gain at 19.3%.
• China rail cargo volumes measured in tons-carried improved by 3.9% year on year according to July statistics. A reversal of a negative trend dating back to Feb 2013.
• Government revenue rose by 9.2% year on year to Rmb858.8bn (US$140.3bn) in August, according to the Ministry of Finance (MOF), while expenditures grew by 6.5% to Rmb960.7bn. The MOF stated that revenue and expenditure increased by 8.1% and 7.4% respectively in January-August over the year-earlier period. Revenue has accelerated since June, buoyed by stronger corporate and personal income tax, as well as resurgent land sales.
None of these are a reason to run out and invest in Chinese stocks today (though their cheap pricing and momentum certainly are). But they do point to a Chinese economy that has likely quit cooling for now.
ACTION TO TAKE
Allocate a portion of your portfolio to Chinese stocks and plan to hold through at least the first quarter of next year. The popular iShares China Large Cap ETF (FXI) is a good option, though KraneShares has some interesting alternatives as well. The KraneShares CSO China Five Year Plan ETF (KFYP) targets Chinese companies that the advisor expects to benefit from the Chinese government’s current five-year plan.
The fund is very thinly traded, so be careful if you decide to buy it. But it also allocated very differently from FXI, with a much higher allocation to technology and consumer stocks. Purchased together, the two ETFs should give you broad exposure to the Chinese market.
Disclosures: Sizemore Capital does not currently have a position in any security mentioned.
