Let me start by saying that the title is a play on a similar title by another contributor to Seeking Alpha. That said, I do think the year 2013 will belong to China, and investors who go in with all guns blazing on China will be richly rewarded.
So, why China? After all, hasn't it broken enough hearts (and portfolios to boot) over the past decade? Here's how the benchmark Shanghai Composite Index has done. To say that it has been volatile is an understatement, as the chart below shows. It has zoomed up by 300% and then fallen by two-thirds. Some roller coaster ride, that! Love for China has indeed been a burning thing for investors.
Let us examine the situation in China from three angles.
1) Is growth back in China?
2) Is China now a value play as well?
3) How can investors benefit?
There has been a spate of economic news lately, which shows that China growth may well be on a trend up. The new regime in China has come out saying that they are going to pursue a pro-growth policy. In managed economy, this is big. Next, the economic indicators are up, as our very own Seeking Alpha Market Currents news desk has consistently reported on. Electricity demand is up, iron ore is on a tear, and rebar prices are strengthening. All of this points to an initial success for the pro-growth policy. So, we can safely conclude that the harbingers of growth are back.
The boom bust nature of the China market makes for a wild swing in the price to earnings ratios. Right before the 2008 crash, the P/E for Shanghai composite was in the mid-40s. Now, it is fluctuating between 11 and 12, significantly below the historical average of the mid-20s. Reports Bloomberg:
The Shanghai gauge's price-to-earnings ratio has dropped from an average 24 during the past decade and a 2007 high of 46, according to data compiled by Bloomberg.
So, what does history tell us about this level of valuation for China? Reports Bloomberg, again:
The last time China's stocks were this cheap in 2008, the benchmark index rose 83 percent in a year.
As I noted in my earlier article, Shopping For The China Bull, growth in China is expected to be 8%+ in 2013. This should help the Chinese stocks to grow earnings in excess of 10-15%, from better fixed cost and SG&A utilization. If we also expect a P/E adjustment to 20 or so (or about 60% gain from the current 11-12), we should get an 80%+ growth in share prices in the Shanghai Composite. Note that a P/E of 20 will still be lower than historical norms.
ETF investors in China have a lot of choices to benefit from this trend. I did an analysis of China ETFs in my article, Which China ETFs Have The Lowest PE? The ETFs in focus were:
- Global X China Financials ETF (CHIX)
- Global X China Materials ETF (CHIM)
- iShares MSCI China Small Cap Index (ECNS)
- iShares FTSE China 25 Index Fund (FXI)
- First Trust China AlphaDEX (FCA)
- Global X China Industrials ETF (CHII)
- iShares FTSE China HK Listed Index (FCHI)
- Guggenheim China Small Cap (HAO)
- iShares MSCI China Index (MCHI)
- SPDR S&P China (GXC)
- Guggenheim China All-Cap (YAO)
- EGShares China Infrastructure (CHXX)
- Global X China Energy ETF (CHIE)
- PowerShares Golden Dragon China (PGJ)
- Guggenheim China Technology (CQQQ)
- Global X China Consumer ETF (CHIQ)
- Global X NASDAQ China Technology ETF (QQQC)
Here is how the annual returns and P/E ratios stack up for these ETFs. Note than none of these are leveraged, and there are leveraged China ETF options for those with a wilder streak.
|ETF Name||Symbol||Trailing P/E||3-month return||1-year return||Beta|
|Global X China Financials ETF||CHIX||7.4||19.9%||30.2%||0.91|
|Global X China Materials ETF||CHIM||7.5||10.4%||-5.5%||0.98|
|iShares MSCI China Small Cap Index||ECNS||8.2||16.0%||15.3%||0.81|
|iShares FTSE China 25 Index Fund||FXI||8.7||11.8%||14.3%||0.92|
|First Trust China AlphaDEX||FCA||9.0||14.2%||25.2%||0.96|
|Global X China Industrials ETF||CHII||9.3||14.6%||17.8%||0.76|
|iShares FTSE China (HK Listed) Index||FCHI||9.5||12.0%||17.7%||0.87|
|Guggenheim China Small Cap||HAO||9.7||15.2%||18.5%||0.88|
|iShares MSCI China Index||MCHI||10.3||11.0%||20.7%||0.87|
|SPDR S&P China||GXC||10.3||10.1%||18.1%||0.87|
|Guggenheim China All-Cap||YAO||10.4||10.5%||17.9%||0.9|
|EGShares China Infrastructure||CHXX||10.8||15.3%||26.9%||0.77|
|Global X China Energy ETF||CHIE||12.5||10.2%||14.1%||0.87|
|PowerShares Golden Dragon China||PGJ||13.6||-3.2%||-6.0%||0.97|
|Guggenheim China Technology||CQQQ||14.6||1.8%||4.3%||0.94|
|Global X China Consumer ETF||CHIQ||16.3||9.2%||6.7%||0.8|
|Global X NASDAQ China Technology ETF||QQQC||17.1||-2.3%||2.0%||1.06|
I am personally in favor of the most liquid China ETF, the iShares FTSE China 25 Index Fund. However, for investors who want more breadth, the iShares MSCI China Index covers more sectors and stocks, and has had better growth (mostly from P/E expansion).
For the next year, though, I think three ETFs deserve very special mention.
The Chinese government is on the record as favoring big infrastructure expansion in 2013. To gain from this trend, I think China investors should consider the EGShares China Infrastructure ETF.
Housing in China is likely to boom, as indicated by the increase in rebar prices. While I didn't analyze the Guggenheim China Real Estate ETF (TAO) in my last article, it think this is ripe for explosion. For the record, this ETF is up more than 50% in 2012.
Finally, if infrastructure and housing are up, this should bode well for the Chinese banks from increased financing activity. To put a punt on this sector, China investors may want to consider the Global X China Financials ETF.
So there you have it, my predictions for 2013. Just so you remember, this is the only prediction that you will ever need. Jokes aside, investors in Chinese infrastructure, housing, and finance should have a good year, in my view.
Disclaimer: This is not meant as investment advice. I do not have a crystal ball. I only have opinions, free at that. Before investing in any of the above-mentioned securities, investors should do their own research, consult their financial advisors, and make their own choice.
Disclosure: I am long FXI.