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.
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.com, www.twitter.com/Accuvest or email [email protected].