China Equities Rally Has Room To Run

April 13, 2015

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 David Allen, a portfolio manager at Walnut Creek, California-based Accuvest Global Advisors.

 

For anyone who has been asleep at the global wheel, China has been the best-performing country in the MSCI ACWI over the last 12 months. It has outpaced the 47-country index average by more than 35 percent, and more than doubled that of the performance of the U.S.

 

The good news for investors who are worried they are late to the game is that China still has plenty of room to run. It is our top country pick this month.

 

From a numbers perspective, China has surging momentum and great valuations. Risks in China have been steadily decreasing, and we think government and central bank actions will keep China firmly in a position of growth.

 

Our country-ranking process is based on MSCI country-level data, so we tend to favor MSCI-based products. Since initiating our overweight to China in 2014, we have rotated between the iShares MSCI China ETF (MCHI | B-34) and the First Trust China AlphaDEX Fund (FCA | F-34), where we currently are positioned. FCA, to be clear, is not based on an MSCI index.

 

Buy What’s Hot And Buy What’s Cheap

Buying stocks based on momentum and valuations are two of the most researched and practiced investment strategies. Finding a stock, or country, that exhibits both qualities can be difficult because of the natural relationship between the two factors.

 

Usually, as momentum/prices increase, the valuations are not far behind. However, with China, we currently can get the best of both worlds.

 

Momentum has been steadily improving during the past year, but has spiked over the last three months. In fact, as of April 8, 2015, China has been the best-performing country over the trailing 12 months of the 46 countries that make up the MSCI ACWI.

 

Even more noteworthy is that, during this time, the average return of those 46 countries is -2.94 percent, while China has returned 32.78 percent.

 

 

Source: Bloomberg, MSCI. Data as of 4/8/2015

 

Despite the run in performance, China remains the second-most-attractive country that we rank from a valuation perspective.

 

Earnings have been strong, keeping price-earnings (P/E) multiples at a significant discount to the rest of the world. Investors interested in finding value will be pleased to see that China looks cheap from both an absolute and a relative perspective, especially when compared with U.S. equities.

 

China is currently trading right near a 50 percent discount to the U.S. for the same level of growth.

 

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