3 reasons to consider Chinese stocks

For those celebrating Chinese New Year, 2019 is the Year of the Pig, the 12^th of the 12-year cycle of animals that name the years.  According to Chinese myth, the pig is the last zodiac sign on the calendar because he overslept and arrived late to the party in which the order of the zodiac was determined.

Although I’m not Chinese, I’m still intrigued by how traditions that are thousands of years old can reverberate with contemporary events. After all, many investors who had missed the China growth boom of the last several years may have watched events over the last year and thought they had arrived late to the party.

Chinese equities plunged 18.8% in 2018[1], recording one of the worst performances in years. (And yes, 2018 was the Year of the Dog.) Rising trade frictions, the impact of tariffs on Chinese growth, and anxiety about a global growth slowdown all were culprits in the dismal performance.

However, China is up more than 8% this year (as of 1/28/19), easily outperforming the S&P 500 Index, which is up 5.6%.  We see three reasons for the turnaround and for optimism for Chinese stocks.

1. Trade frictions have eased.

The U.S. has imposed 10-25% tariffs on a total of $250 billion of imports from China and implemented new rules to restrict China’s overseas investments in sensitive U.S. industries such as semiconductors and aircrafts, but last December, the U.S and China agreed to put further tariff hikes on hold for 90 days while resuming negotiations.  Although tensions are not likely to go away over the long term, we see room for trade frictions to subside in the short run. Both sides have incentives not to escalate the conflict and December’s market volatility in the U.S. stock market has led to wider recognition that trade tensions could hurt domestic business confidence and employment.

 

2. More stimulus could come in 2019.

Chinese policymakers have rolled out a number of monetary, regulatory, and easing measures to help support growth and mitigate the negative sentiment that has resulted from the trade tensions and growth slowdown. Recently, China announced 1.3 trillion yuan ($193 billion) worth of new measures including tax cuts for small businesses and reduced tariffs. Other policy implementations such as greater financial market openness, private sector support and infrastructure spending could further support economic growth and boost Chinese equities.

3. China is looking more attractive.

Chinese equities have cheapened significantly to a forward PE ratio of 10.6 from the 2018 high of 14.8. [2] However, as the economy is driven more and more by domestic consumption, the corporate earnings outlook still looks quite stable. Analysts currently expect Chinese earnings to grow 13.6% in 2019, and any improvement in sentiment will likely lift equity multiples off their depressed levels.[3]

Bottom Line

To be sure, there are many reasons to be cautious with respect to China. It is easy to imagine trade tensions reigniting or the economic data disappointing. But the outlook for China is still promising and the performance this year reflects that. After all, it is important to remember the symbolism of the Lunar New Year: With their chubby faces and big ears, pigs are often viewed as a symbol of wealth in Chinese culture.

Related iShares funds

FXI–iShares China Large-Cap ETF

MCHI–iShares MSCI China ETF

CNYA–iShares MSCI China A ETF

Chris Dhanraj is the Head of the iShares Investment Strategy team and a regular contributor to The Blog. Jasmine Fan contributed to this article.

[1] Source: Bloomberg, based on the MSCI China Index [2] Source: Bloomberg, as of 1/15/2018, based on the MSCI China Index. [3] Source: Thomson Reuters, as of 1/15/2018, based on analyst expectations of earnings growth of the companies represented in the MSCI China Index. Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal. Index performance is for illustrative purposes only.  Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Index performance does not represent actual iShares Fund performance. For actual fund performance, please visit www.iShares.com or www.blackrock.com. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries. The iShares MSCI China A ETF (the “Fund”) seeks to invest in A-shares through Stock Connect, a securities trading and clearing program that aims to provide stock access between the People’s Republic of China and Hong Kong. Trading through Stock Connect is subject to a daily quota (the “Daily Quota”), which limits the maximum net purchases under Stock Connect each day, and as such, buy orders for A-shares would be rejected once the Daily Quota is exceeded. The A-shares market has a greater risk for market suspensions than other global markets.   These risks may cause the Fund have higher tracking error and/or greater costs than other international investments. This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular. This document contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader. The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”). The iShares Funds are not sponsored, endorsed, issued, sold or promoted by MSCI Inc., nor does this company make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with MSCI Inc. ©2019 BlackRock. iSHARES and BLACKROCK are registered trademarks of BlackRock. All other marks are the property of their respective owners. ICRMH0219U-729440-1/1

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