China Equities Rally Has Room To Run

April 13, 2015

 

Source: MSCI. Data as of 3/31/2015.

 

Growth Is Strong And Risks Are Muted

The main investment risk that most investors associate with China is slowing growth from tightening credit. Currently, China has the fourth-strongest fundamental ranking of any country we follow.

 

When looking at return on equity (ROE), internal growth rate and sales per share, China is growing much faster than the rest of the world. While the earnings growth of most countries has been negative over the last year, China remains positive.

 

Source: MSCI. Data as of 3/31/2015.

 

In recent months the People’s Bank of China has demonstrated it is ready to stimulate domestic growth and provide a backstop if global growth starts to slow.

 

Just last month, Premier Li Keqiang promised to support growth if employment numbers started to drop. The central bank also has the ability to follow the model implemented by the U.S., Japan and Europe to stimulate domestic demand.

 

Which ETF Is The Right One To Choose?

From an investment perspective, we feel there are two good options to access mainland China (non A-shares). MCHI and FCA are both MSCI-based, but offer a substantially different profile. The biggest difference between the two results from the weighting methodology leading to some noteworthy off-sector bets.

 

FCA is overweight materials, consumer discretionary and industrials. The biggest underweights are in energy, information technology and telecommunication services. These overweights and underweights are a byproduct of moving away from the largest holdings.

 

Tencent, China Mobile, China Construction and Bank of China currently constitute 37.8 percent of MCHI and less than 5 percent of FCA. We also like that the index construction of FCA makes it 25 percent cheaper than MCHI and tilts toward significantly faster-growing companies.

 

At the time of writing, the author’s firm owned shares of FCA in client portfolios.


Accuvest Global Advisors (AGA) is a registered investment advisor based in the San Francisco Bay Area. Founded in 2005, AGA has drawn considerable recognition in the industry for its work in building global strategies through the use of single-country ETFs. For more thought leadership and firm updates, visit www.accuvestblog.comwww.twitter.com/Accuvest or email [email protected].

 

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