3 Views: Buy Or Bail On China ETFs?

3 Views: Buy Or Bail On China ETFs?

Three ETF strategists share their views on what investors should do about China.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

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.

Susanne Alexandor, VP, client portfolio manager at Toronto-based Cougar Global Investments:

We believe the risks of China suffering a hard landing are low, but the uncertainty regarding how China is transitioning its economy has increased.

There is a risk of policy mistakes that could lead to an even weaker yuan, which would negatively impact other Asian countries including Japan, and even Europe.

The impact of a slower-growing China should have a minimal impact on the U.S. We therefore sold the iShares MSCI All Country Asia ex Japan ETF (AAXJ | B-93); reduced currency-hedged Japan, with the iShares Currency Hedged MSCI Japan (HEWJ | D-38); and sold Europe, with the iShares MSCI EMU (EZU | A-82).

We reallocated back to the U.S., which has been our largest holding across our mandates. We remain positive on the outlook for the U.S. economy, and chose to increase our exposure to the sector of the stock market most domestically oriented.

Robbie Cannon, CEO at Horizon Investments of Charlotte, North Carolina:

China is similar to the oil market in that neither is fully market driven. The oil market is a cartel with a pricing mechanism. China's market is a command economy, and is driven by its political party, a party that can enter, exit and change market dynamics as it sees fit.

It is learning how to communicate in a fast-paced global world where policy decisions have real market consequences.

They are emerging, and continue to be interesting in doses, but should not be a significant portion of anyone's portfolio.

In fact, Chinese investors currently on the whole are underweight Chinese equities as it relates to their overall wealth. What do they know that we don't?

Contact Cinthia Murphy at [email protected].

Cinthia Murphy is head of digital experience, advocating for the user in all that etf.com does. She previously served as managing editor and writer for etf.com, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.