Has the Moment for Buying China Equities Passed By?

 

Have patience. Wait until the mud settles and the water is clear. Remain unmoving until right action arises by itself.” — Lao Tzu

 

Back towards the beginning of July, the Dow Jones Industrial Average (DJIA) was up 13.8% for the year, and the S&P 500 Index (SPX) followed pretty close behind, coming in around 13% over that same time-frame. Even though Wall Street had just experienced a sharp fall-off towards the end of June, the market proved resilient, and the year’s second uptrend began to take shape shortly after July 4.

From a global perspective, however, the US equity market seemed to be largely the exception to the rule, as many of the world’s leading markets underperformed, at least in relationship to the US markets.

Firmly ensconced in the category of under-performance was the China equity market. It had just suffered a serious correction in a condensed time frame, falling 15% in June alone.

The steep dive, attributed to a one-two punch of bank liquidity problems and an overall weak economy, seemed to be a distress signal to investors, who were left questioning whether China’s economy was heading for a hard landing after all.

As it turned out, the moment proved to be somewhat less a harbinger of a worsening economy than an opportunity to buy the dip.

Since the end of June, several ETFs that track various elements of China’s equity market have shown notable gains.

For example, FXI (iShares China Large-Cap ETF), which tracks the FTSE China 25 Index and is composed of the largest companies in China’s equity market, is up nearly 14% over the last three months.

Another ETF, PGJ (Golden Dragon Halter USX China Portfolio) is up over 30% for the same time frame. PGJ, which tracks the Halter USX China Index and is comprised of US-listed securities of companies that derive a majority of revenue from China, is up an impressive 43% for the year.

So the question that investors might ask is: “Did we miss an opportunity to catch the China equity market at a particularly attractive entry point?”

Any accurate answer to that question will unfold, of course, somewhere down the time horizon.

But according to a recent assessment by the World Bank Group’s current president, Jim Yong Kim, China is expected to meet its 2013 GDP projection of 7.5%, something that was considered highly questionable as recently as July. The sentiment seems to have found a concurrence among many of the world’s largest banks, which support Kim’s assessment, which likely takes into account China’s stronger-than-expected August economic data.

So for those investors who are hungering for a taste of China’s economy in their portfolio, there does seem to be a new consensus forming that the current odds of a soft landing are now the wager of choice.

What the Periscope Sees

Here is the current list of the top six China equity-based ETFs, ranked in terms of assets and featuring year-to-date returns.

It is worthy of noting that a mere two months back, among the ETFs listed below, only PGJ was in the black for the year.

Since then, more than half of the ETFs on this list have experienced 10% gains or greater, and all have experienced movement into the black by at least 3%. Meanwhile, the S&P 500 Index finds itself at the same level it started at two months ago.

FXI — iShares FTSE China 25 Index Fund, -5.54%

EWH — iShares MSCI Hong Kong Index Fund, +1.03%

MCHI — iShares MSCI China Index, -2.89%

GXC — SPDR S&P China ETF, +1.04%

HAO — Guggenheim China Small Cap ETF, +2.63%

PGJ — PowerShares Golden Dragon Halter USX China Portfolio, +43.22%

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Daniel Sckolnik or Sabrient. Neither Daniel Sckolnik nor Sabrient makes any representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.