China: No Bursting Bubble, Buy The Banks

August 03, 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 features Tyler Mordy, president and co-chief investment strategist of Toronto-based Hahn Investment Stewards.

“Beautiful sunlight always comes after the rain.” So declared the Asset Management Association of China in a somewhat Confucian statement following recent carnage in the mainland’s stock market.

Many investors may scoff at the above, but no one should question whether China’s future is a key concern for investors. It is. As the country’s world economic footprint has increased, its impact on client portfolios has also been amplified. Getting China “right” is increasingly crucial.

Yet, wide-ranging perspectives are generating confusion and volatility, adding a new dimension of risk to the “China factor” on a still-fragile world.

The China Debate

Two main opposing views frame the debate. The first is that the era of China’s blockbuster growth is over. In the past decade, the country built its economy through massive infrastructure and export promotion, becoming the world’s largest trading nation and second-largest economy.

From 2002 to 2011, China grew at an average GDP rate of 11 percent. That is enormous. Unsurprisingly, many commodity-oriented countries and sectors profited handsomely during that period.

But GDP is now dramatically slowing to less than 7 percent—and perhaps substantially lower in the coming years. Further moderation is near certain. Debt also continues to rise, and a necessary deleveraging phase can only contribute to even more tepid growth. Now the boom is over and related investments will suffer.

The above is the dominant market view. However, that perspective very likely represents both a failure to think outside the Western box and to read Beijing’s policy signals.

Our actionable takeaway in preview? Buy China’s banks through ETFs like the Global X China Financials ETF (CHIX | B-96) or even the iShares China Large-Cap ETF (FXI | B-41), which has more than 50 percent in Chinese financials exposure.

To be sure, this is a highly unpopular view. We have written extensively on China and continue to support a bullish view, but with the added recommendation to overweight the banks.

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