As China’s economic outlook dims, KraneShares Chief Investment Officer Brendan Ahern has this message for investors about the world’s second-biggest economy: Stay in.
Home to the world’s No. 2 stock market after the U.S., China still offers “great opportunities,” he last week told hosts Sumit Roy and Heather Bell on ETF.com’s Exchange Traded Fridays podcast.
“You have exposure to China implicitly, through great U.S. multinational corporations, that are doing great business in China,” Ahern explained. “That can be companies geared to China's growing urban middle class like Apple and Nike, but it's also industrial companies like Boeing and Exxon Mobil.”
New York-based KraneShares is majority owned by China International Capital Corp., a Beijing-based investment bank.
China’s size isn’t reflected in stock benchmarks, Ahern said, noting it makes up less than 5% of MSCI’S All Country World Index. The U.S., by comparison, makes up 60% of the index, and China remains an important trade partner for U.S. companies.
KraneShares focuses on research and ETFs covering China’s markets for the U.S. market. It offers 30 ETFs with more than $8 billion in assets under management.
The issuer must contend with disappointing news out of China lately, which is reflected in other exchange-traded funds. The top China ETF, the $7 billion iShares MSCI China ETF (MCHI), is down nearly 29% year to date, while the SPDR S&P 500 ETF Trust (SPY) is down roughly 20% during the same period.
GDP Forecast Cut
Ahern cited a number of factors punishing China’s economy, including U.S.-China political relations, the Russian invasion of Ukraine and concerns around China’s internet regulation. The Asian Development Bank noted these and other issues including harsh COVID-19 lockdowns when it cut its forecasts for China economic growth this year to 3.3% from 5%, and to 4.5% from 4.8% for next year. ADB:
However, catalysts to economic growth may outweigh those issues, Ahern said, listing aspects such as the potential relaxation of the country’s zero-COVID-19 policies, the potential approval of an mRNA vaccine in the country that will protect against multiple strains of COVID-19, and audits likely being done on China’s American depositary receipts (which China has been reluctant to allow). Rising demand for health care and clean technology also support investment in the country.
“There are all these positives out there. We just need investors to be a little bit more focused on them,” Ahern added.
KWEB’s Fall From Grace
The KraneShares CSI China Internet ETF (KWEB) is the issuer’s largest fund, at $5.7 billion in assets under management. Its decline of 30% year to date is only slightly worse than that of the broad China market. At the same time, the fund was dragged down by China’s technology industry crackdown that started in late 2020 and affected internet and fintech companies, among others.
“Regulation is not necessarily a bad thing, but the implementation of this regulation wasn't done in a very transparent fashion. It wasn't very well communicated. Markets always hate uncertainty,” Ahern noted, adding that he thinks the worst is behind investors in this area and the factors weighing on it are “nonfundamental.”
Despite the fund’s downturn, KWEB has pulled in $1.7 billion in flows this year, suggesting investors agree with Ahern’s optimism around the sector. He notes that his firm has moved to shift many of the assets held by KWEB from ADRs to their Hong Kong share classes, which he thinks has helped the fund continue to attract investor dollars.
“We'll continue to make that movement as a fiduciary to protect our investors’ assets. We're not going to stand idle with the threat of a delisting—we're going to protect our shareholders,” Ahern said, referring to the U.S.’ threat to delist ADRs of Chinese companies that don’t submit to an auditing process.
Contact Heather Bell at heather.be[email protected]