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 K. Sean Clark, chief investment officer of Philadelphia-based Clark Capital Management.
I recently spoke on a panel hosted by S&P Dow Jones on the topic of the fixed income and equity markets in China. I’ll share some of my thoughts on China specifically, but first I’d like to address the larger opportunity we see playing out across the Asia-Pacific markets.
In the ETF space, the iShares MSCI All Country Asia ex Japan ETF (AAXJ | B-85) has exhibited relative strength globally. Furthermore, many of the countries in the region are exhibiting relative strength and strong valuations. In other words, they are advancing at a faster clip than their peers and they are relatively cheap—the best of both worlds.
The iShares MSCI South Korea Capped ETF (EWY | B-93) has been the biggest mover in the last six weeks among all the countries we monitor. It’s important to note that Samsung, which is not available for purchase via an ADR, accounts for 20 percent of the South Korea ETF. Samsung has helped support South Korea’s growth, but the high concentration of the company in EWY results in reliance on Samsung to perform. Also, the recent easing of the currency wars between China and Japan has helped South Korea’s currency—the won—stabilize.
The iShares MSCI Taiwan ETF (EWT | B-94) is another strong player in the relative-strength-at-a-discount market in Southeast Asia. Taiwan’s shared language, culture and history with China make it an excellent broader long-term play on Chinese growth. As with Samsung in EWY, there’s a high concentration of a single company in EWT, Taiwan Semiconductor, which makes up 23 percent of EWT.
As such, we tend to favor AAXJ for its broad-based, diversified exposure to Asia ex-Japan.
With an overall positive attitude toward the Asia-Pacific region, let’s delve into some of the specifics on China.
We think the Chinese stock markets have the potential to do well into the future for three main reasons:
- The favorable equity valuation (price-to-earnings multiples, or P/E, of the China offshore equity market
- The historic growth rate of the Chinese economy and expanding manufacturing and service PMIs, or purchasing
- The 50- and 200-day moving averages and relative strength of China, which look attractive when compared with their benchmarks
3 Important Factors
To an asset manager making allocation decisions in global markets, China stacks up well. There are three characteristics we believe are particularly appealing: First, there are clear catalysts for change; second, valuations are attractive on a relative and absolute basis; and finally, China has displayed good relative strength along with strong price trends.
As far as the catalyst goes, the Chinese government has shown a commitment to market liberalization, and more importantly, to globalization of the Chinese economy. With reforms to support private companies, liberalize markets and open the financial sector, the Chinese government intends to boost the market economy and strengthen the drivers of economic growth.
Starting May 1, the government will insure individual deposits of up to 500,000 yuan (about $81,000) at Chinese banks. By providing an explicit guarantee on bank deposits, the insurance plan paves the way for Beijing to liberalize deposit interest rates, allowing banks to compete more fiercely to attract new depositors.
At the same time, it will enable China's government to step back from its implicit promise not to let individual banks fail, injecting free market risk into the system. This deposit insurance is a key step toward curbing the moral hazard and widespread capital misallocation that characterize China's economy.