Attractive Relative Strength
The third characteristic in China’s favor is good relative strength.
Investors evidently are continuing to adopt the expectation that the People’s Bank of China will deliver more policy directives in coming months and that the U.S. Fed will be cautious about its policy deliberations.
That has helped lead the markets higher. Asian stocks had their biggest quarterly advance since 2012 amid speculation that central bank stimulus globally will continue to support asset prices. The Shanghai and CSI indexes gained 15.9 percent and 14.7 percent, respectively, in the first quarter.
An A-Shares Bubble?
The rise in price of A-shares does seem a little bubble-ish recently. That seems to be the case even more so when considering that new, probably inexperienced and less educated retail investors in China are entering the market and opening trading accounts at a record pace.
Given the valuation analysis earlier between the H- and A-shares, this is one big reason we like investing in China via ETFs. Specifically, China ETFs give us the ability to access the emerging market with the most global impact and strongest growth potential.
In fact, we have a large overweight in China. In our international portfolios, we own 15 percent China versus 5.5 percent for the benchmark. In global portfolios, we own 6.75 percent China versus a benchmark weight of 2.5 percent. Our exposure is primarily in the SPDR S&P China ETC (GXC | C-35).
We like this ETF because it gives us good China exposure, access to the H-shares that we view as undervalued and, with an annual expense ratio of 59 basis points—or $59 for each $10,000 invested—it’s cheap compared with other choices. From a valuation perspective, it is attractive. The underlying index it tracks has a P/E of 11.77 with an estimated three- to five-year earnings-per-share growth rate of 17.35 percent.
When it comes to investing in China, the Asia-Pacific region or any emerging market opportunities, it’s important to recall that the S&P 500 Index and U.S. large-cap stocks have dominated the landscape for most of the last few years.
We think that the opportunities in Asia may represent a larger trend whereby the benefits of diversification finally pay off again for investors who adopt a diversified, long-term approach.
At the time of publishing, the author’s firm owned shares of AAXJ and GXC in client portfolios. Clark Capital Management Group is an independent investment advisory firm providing institutional-quality investment solutions to individual investors, corporations, foundations and retirement plans. Clark Capital was founded in 1986 and has been entrusted with approximately $3 billion in assets. For more information about Clark, contact Advisor Support at 800-766-2264 or [email protected]. Please click here for a complete list of relevant disclosures and definitions.