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China’s economy stalled last year amidst strict lockdowns related to Zero-Covid policies, in addition to an ailing property market. This weighed on Chinese stocks, with the iShares MSCI China ETF (NASDAQ:MCHI), an ETF that holds 631 large and mid-cap Chinese companies, losing approximately 41% of its value in 2022 (compared to -19% for the S&P 500 Index).
However, Chinese officials have finally pivoted away from their Zero-Covid posture which should provide an uplift to growth expectations. This has fueled a mini-rally over the past two months.
After an abysmal 2022, the following China ETFs have recovered substantially from October lows.
Recovery optimism has taken hold as investors see a clear path to the end of covid-lockdowns, and their associated impact on the Chinese economy. While there may well be a surge in Covid cases following the ending of some restrictions – not to mention increased nationwide travel over the Chinese New Year holiday season - the rest of the world has already seen this playbook unfold; an initial uptick in cases being met with eventual herd immunity.
The majority of this outperformance is likely to be attributed to optimism from investors who are betting on the reopening unfolding throughout China, jumpstarting the massive economy. While the path may be very bumpy, investors seem to be willing to overlook short-term volatility associated with two key factors:
Overall, the end of the Covid-Zero policies marks a turning point for the country as more than two years of restrictions have dampened the country’s growth outlook significantly.
There are numerous segments of the Chinese economy which could make a turn for the better in 2023, this includes:
All of these factors point to continued outperformance for Chinese stocks.
Earlier, we highlighted three ETFs that have been outperforming from October lows. Depending on your individual risk tolerance, all three funds provide a convenient way to gain exposure to the (slow) reopening of the world’s second-largest economy.
This ETF from BlackRock (NYSE:BLK) provides exposure to 631 large and mid-sized companies strictly based in China. The ETF is a highly diversified ETF which is heavily weighted in the Consumer Discretionary (31% of the total market value), Communication (19%), and Financials (15%) sectors.
KWEB from KraneShares provides exposure to companies focused on internet, and internet-related, technology within China. This ETF, while more exposed to more volatile tech names, provides more upside potential at the cost of greater risk. Some of its largest holdings include Tencent (HK:0700) Holdings (OTC:TCEHY) (11% of market value), Alibaba (NYSE:BABA) (10%), Meituan (7%), and JD (NASDAQ:JD).com (6%).
FXI from iShares is a “safer” option for investors as it provides exposure to less volatile large-cap companies within China. It holds 50 of the largest Chinese stocks, and is also heavily weighted to Consumer Discretionary, Financials and Communication sectors, with a greater accent on Financials.
Data as of January 18, 2023.
This content was originally published by our partners at ETF Central.
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