China Fund FXI Soars, But Few Riding Rally

April 09, 2015

The iShares China Large-Cap Fund (FXI | B-47) is on a tear, surging more than 21 percent year-to-date on growing expectations that the Chinese government might embark on fiscal easing in the coming months. ETF investors have yet to jump into the rally, but jump in they might.

 

FXI is the largest and most popular China ETF in the market today, with more than $6 billion in assets. Its focus on China’s largest companies listed in Hong Kong resonates well with U.S. investors looking for exposure to China’s large-cap segment.

 

So far this year, demand for that type of exposure has been muted, to say the least—FXI has actually bled a net of $188 million in assets even as it rallied. The outflows could be a reflection of widespread aversion for emerging market exposure in general following two years of significant underperformance relative to U.S. stocks. 

 

In fact, FXI has not been alone in its struggle to attract investor dollars. Some broad emerging market ETFs where China is the largest holding have also faced outflows year-to-date. The iShares MSCI Emerging Markets ETF (EEM | B-99) has seen $2.9 billion in net redemptions so far this year, while the Vanguard FTSE Emerging Markets ETF (VWO | B-85) has bled $374 million. But all that could be changing. 

 

Changing Picture

China’s finance minister said earlier this month that fiscal policies aimed at deleveraging the highly indebted country could be in the cards this year, as the country looks to prevent its slowing economy from stalling completely, according to Reuters.

 

If five-plus years of Fed monetary easing has taught us anything, it’s that equity markets like easy money policies. FXI’s ongoing rally seems to be another testament of that, and if policies do take hold in China, investor assets could soon follow the burgeoning rally in equities there.

 

 

Last fall, Tyler Mordy, president and co-chief investment officer of Hahn Investment Stewards, was already calling for a bull market in China for three main reasons: First, because widely advertised “crashes” rarely actually show up; secondly, because much of China’s slowdown has been coordinated by policy; thirdly, because China’s A-share market was “priced for systemic collapse.”

 

“All of the above is still in place,” he told ETF.com today. “Perhaps more importantly now, monetary policy has turned highly stimulative. This is always good for stock markets. And China, like many other Asian countries, has entered a triple-merit scenario of falling interest rates, stable currencies and rising asset prices.”

 

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