So far this year, the market is in the red mainly due to an acute global selloff at the start of February on global rising rate concerns.
This makes it important to judge how Chinese equities and ETFs will perform in the New Year – the year of dog.
Economic Growth Improving
China’s economy grew at a faster clip than expected in the fourth quarter of 2017, thanks to an export recovery. It was the first annual acceleration in growth in seven years, confronting concerns that “curbs on industry and credit would hurt expansion.” China’s exports grew at the quickest clip in four years, last year.
GDP growth was 6.8% in the October to December period from a year earlier, which was better than 6.7% growth forecast by analysts in a Reuters poll and unchanged from the last quarter.
Economy & Markets in Transformation
The country’s 19th National Congress of the Communist Party meeting indicated “coordinated policies to reduce financial risks, more institutionalized environment policies, and accelerated state-owned enterprise (SOE) reforms,” as viewed by HSBC’s Greater China Economist Julia Wang (read: Follow These ETFs as China’s 19th National Congress Begins).
Chinese President Xi Jinping also indicated that “China will relax market access for foreign investment and expand access to its services sector, as well as deepen market-oriented reform of its exchange rate and financial system, while at the same time strengthening state firms.” The country is looking to reduce debt and pollution in older industries without inhibiting growth.
Also, China “opened up the domestic bond market and the fund management sector to foreign companies.” MSCI (MSCI) announced last June that it would add China A shares in the MSCI Emerging Markets Index and the MSCI ACWI Index, beginning June 2018.
However, economists expect the growth momentum to slow this year as firms will likely incur higher borrowing costs. The government is striving to take credit growth under control and put a curb on pollution both of which are likely to weigh on the industrial sector of China.
What Could be Chinese Dogs of 2018?
Against the above-mentioned backdrop, below we highlight a few ETF areas that could perform well ahead.
There were affirming signs in the household sector in 2017, as per Reuters. This makes it important to look at the China consumer fund. The fund is designed to reflect the performance of the consumer sector in that country. The fund charges 65 bps in fees. Travel (21.3%), Automobiles & Components (18.5%), Food Beverage & Tobacco (14.5%) and Consumer Durables & Apparel (11.3%) hold the top four spots in the fund (read: 8 New ETFs of 2017 to Explode in 2018).
China’s technology sector has been exhibiting stellar growth in recent times. Stocks like Baidu, Alibaba and Tencent hold great promises over the long term. “The Chinese government almost ensures that Baidu will have a near monopolyon the internet search space for years to come,” according to an article published seeking alpha.
With A-Shares likely to get an entry to MSCI index, A-shares especially deserve a mention in the year of dog. The fund is governed by financial, industrials and consumer discretionary stocks.
The iShares FTSE/Xinhua China 25 Index ETF (FXI) closed at $49.37 on Friday, up $0.01 (+0.02%). Year-to-date, FXI has gained 6.93%, versus a 2.34% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Zacks Research.