The China trade is back in vogue.
That’s at least according to Luke Oliver, head of index investing for the Americas at DWS Group, who told CNBC’s “ETF Edge” on Monday that the world’s second-largest economy presents a “huge opportunity” for investors as it recovers from the coronavirus‘s economic damage.
Oliver’s firm runs the Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR), the fourth-largest China ETF on the market by assets. It is up over 18% year to date.
“I think it’s universally acknowledged that China will become the biggest economy in the world, not if it will become the biggest economy in the world,” Oliver said. “And the thing that gets me every time is that investors are structurally underweight China. Because of historical access issues and liquidity issues, most benchmarks don’t include as much China as they should.”
That tends to render A shares, or domestic Chinese stocks, “generally undervalued,” Oliver said.
“So, there is a big upside with China,” he said. “China had its V-shaped recovery complete by Q2 this year and it’s the only country we think will be back on track to its 2019 levels by year-end. Globally, we see 2022. And we just increased our forecast this year from 1% GDP growth to 2[%]. Now, next year, 2021, we’re expecting to be back at 8.5% GDP growth.”
While the upcoming U.S. presidential election poses some risk to Chinese stocks given looming tensions between the countries, Chinese markets are well equipped to handle it, Oliver added.
“China has shifted to being a self-reliant economy. Over 50% of their GDP comes from consumption within China,” he said. “It becomes less reliant on the rest of the world and that actually, I think, makes it more interesting long term because correlations could remain very low for China and you’ve still got these higher growth rates to be expected.”
Steve Grasso, director of institutional sales at Stuart Frankel, flagged two additional headwinds for the China trade.
“There’s the human rights violations in China that are both a Democrat concern and a Republican concern,” Grasso said in the same “ETF Edge” interview. “You also have to think about accounting standards. So, that’s been a major focus for investors to avoid Chinese stocks and to make them sort of adhere to the same accounting standards that we have here.”
For investors itching to get in on China’s potential upside, Grasso suggested either sticking with large-cap tech names that are working such as Alibaba or making a more under-the-radar recovery play.
“If you’re talking about a recovery in China, then you can’t avoid starting to talk about the casinos and their Macao arm,” he said. “If you look at Wynn and Las Vegas Sands, Wynn is down [42]% year to date. They derive [$]4.6 billion in revenue from Macao. And Las Vegas Sands is down [26]% year to date and they’re at [$]8.8 billion in revenue from Macao. So, the casinos could see a pretty big whip back, if you will, since they’ve been underperforming and since they were the hardest hit from the virus.”
The VanEck Vectors Gaming ETF (BJK), down about 3% this year, holds both Wynn and Las Vegas Sands shares in its portfolio.
As always, it’s worth knowing what you own before diving headfirst into Chinese stocks, Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA Research, said in the same “ETF Edge” interview.
“If you own an emerging market ETF” such as the iShares Core MSCI Emerging Markets ETF (IEMG) or Vanguard’s FTSE Emerging Markets Index Fund ETF (VWO), “you have a heavy weighting” in China already, Rosenbluth said.
Chinese stocks account for roughly 37% of IEMG and more than 40% of VWO’s holdings. The popular iShares MSCI Emerging Markets ETF (EEM) has a 41% weighting in Chinese equities.
Overall, China’s recovery has “helped to drive the broader market,” Rosenluth said. “But A-share companies have outperformed even better. We’re seeing technology companies outperform.”
For one, the KraneShares CSI China Internet ETF (KWEB), which counts Alibaba, Tencent and JD.com’s stocks among its top holdings, has exploded this year, up by more than 42%.
“We think that’s a good way to be able to play” China, Rosenbluth said. “If this growth theme is going to continue, then you want exposure to the emerging market companies that you can get through some of these ETFs.”
