As the emerging markets come back into favor, investors need to tune in closely to China.
This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article is by K. Sean Clark, CFA, chief investment officer of Philadelphia-based Clark Capital Management.
Emerging markets have been the clear-cut winners among international markets so far this year. Year-to-date through Aug. 29, the MSCI Emerging Market Index is up 10.73 percent and the MSCI EAFE Index is up only 3.10 percent.
As we think about emerging markets, we believe China and its influence on the global scene must be considered.
The world’s No. 2 economy has been under pressure as it attempts to transform from an export-driven to domestic-driven economy. Following a two-quarter slowdown, China’s economy accelerated to a 7.5 percent growth rate.
We’re bullish on China for a number of reasons—short and long term—which I’ll get into, even if some of the worries are still there. For example, the European slowdown seems to be partially responsible for more concern that China asset prices could again come under pressure.
Looking Beyond Worries
Recent government data showed China’s new credit growth for July plunged to the lowest level since October 2008 as expansion in industrial output slowed.
In addition, the Chinese real estate market has been sluggish, with new home prices falling last month in nearly all cities that the government tracks. Despite economic concerns, investors are beginning to return to China.
We see two important factors that have investors eyeing Chinese stocks: signs that a government stimulus program will support growth in the world’s second-largest economy; and sharp underperformance that has resulted in a steep valuation discount to the developed world.
Let’s begin by looking at performance of the Chinese market, which has persistently underperformed developed markets since the end of the 2008. For example, using the SPDR S&P China ETF (GXC | B-43) and the Guggenheim China Small Cap (HAO | C-26) as proxies for China, the two funds have underperformed the SPDR S&P 500 ETF (SPY | A-98) from Dec. 31, 2008 to Aug. 29, 2014.
| Chinese Market Performance, 12/31/2008 to 8/29/2014 | ||
| Ticker | Total Return | Gain Per Year |
| SPY | 149.27% | 17.50% |
| GXC | 98.01% | 12.82% |
| HAO | 117.29% | 14.69% |
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Source: Bloomberg |
