3 Views: Buy Or Bail On China ETFs?

September 04, 2015

China has been rattling global markets this summer, as government attempts to prop up the stock market do little but erode investor confidence on the country’s economic health and growth prospects.

The spectacular 50-plus-percent rally in China’s mainland equity market in 2014 lost steam this year, and A-share funds such as the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR | D-53) are now down 16 percent year-to-date.

Those losses have been particularly steep in recent weeks. In the past four weeks alone, ASHR has slipped more than 20 percent and H-shares-focused iShares China Large-Cap ETF (FXI | B-39) is down nearly 15 percent, as the chart below shows.

Chart courtesy of StockCharts.com

The downward momentum spurred us to ask ETF strategists the following question: What's your view on investing in China? Has it changed this summer, or has it been re-enforced, and why?

Here’s what they had to say:

Michael McClary, chief Investment officer at ValMark Advisers of Akron, Ohio:

China continues to experience the stops and starts expected for an economy just beginning to smell freedom for the first time. While we would expect a toddler to struggle with beginning to walk, it has been hard for many investors to grasp the structural issues that China is now experiencing.

As one of the world’s largest economies, it is difficult to fathom that China’s stock market is behaving like a toddler walking for the first time. However, investors might understand more if they pictured the Chinese market as an adult who has not been permitted to walk until just recently.

The binds of government constraint are just beginning to break on the markets, and the process should not be expected to be smooth and orderly.

For much of the last few months, investors have been experiencing an environment of erratic opening and closing of doors by the Chinese government. While the long-term trend and goal appears to be toward a more open Chinese economy and stock market, additional volatility should be expected.

As a reminder, however, China continues to be one of the fastest-growing economies in the world. Assuming the GDP numbers are even within 2-3 percent of what is reported, China is still one of the largest economies, and growing at a pace that most developed countries could only dream of. And despite the significant pullback in the Shanghai exchange in recent months, the Shanghai Composite Index is still relatively flat for the year.

So I think it’s hard to argue that long-term global investors shouldn't have some exposure to Chinese stocks, both A- and H-shares. We have been concerned about heightened valuations in China, especially in the A-share market. But after recent pullbacks, H-shares and A-shares are trading at P/E ratios of about 10 and 15 respectively, which seems to be a relatively fair entry point for long-term investors. Still, investors should be prepared for the fact that things might get worse before they get better.

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