Chinese ADRs Still Outperforming Chinese Stocks

In a late July report to Bespoke Premium clients, we noted that even though the sizzling stock market in China was generally closed to outside investors, US investors still had plenty of (and in some cases superior) options to invest in Chinese stocks through the vast number of Chinese ADRs trading on US exchanges. There are currently over 125 Chinese ADRs that trade on US exchanges, and of those, 58 have market caps of more than $300 million. The most impressive aspect of these ADRs was that as of late July, a basket of the 58 largest Chinese ADRs was actually outperforming the Chinese stock market (Shanghai Composite).

Now that the Chinese stock market is down over 17% from its high, we updated our performance of Chinese ADRs to see how they have been holding up. The results have been surprisingly strong. As shown in the chart below, Chinese ADRs are still up nearly 80% YTD, while the Shanghai Composite is up just under 58%. Since the August 4th high, Chinese ADRs are down 8.9% compared to a decline of 17.3% for the Shanghai Composite. Based on these results, Chinese ADRs either have further to fall, or else the sell-off in Chinese stocks is overdone.

Comments

[Bill L.:]

Curious if you had any thoughts on the divergence with the Baltic Dry Index. It (and China) diverged in Feburary and March, correctly predicting a low in stocks, however now it has been bearishly diverging since June.

Since China is so sensitive to exporting, how does this play into your thesis of China outperforming?

Aug 17 03:26 PM

[Alan Young:]

This should be no surprise. The Chinese investors who buy in Shanghai have fewer investment options, and less experience than the international investors who trade H-shares or ADRs, so of course Shanghai is more volatile.

Aug 17 05:02 PM

[Paul Harper:]

if you look at the majority of ADRs, they are non-exporters / telecoms, internet, services etc. Demand remains, therefore (intelligent) investors in ADRs are not so tied up in the market risk.

am long on all three major telcos


On Aug 17 03:26 PM Bill L. wrote:

> Curious if you had any thoughts on the divergence with the Baltic
> Dry Index. It (and China) diverged in Feburary and March, correctly
> predicting a low in stocks, however now it has been bearishly diverging
> since June.
>
> Since China is so sensitive to exporting, how does this play into
> your thesis of China outperforming?

Aug 17 05:11 PM

[zenstar666:]

Anyone know the best way to play the Chinese ADRs? I assume FXI to start, but are there any more ETFs that include more than just 25 mostly state owned companies?

Aug 18 09:46 AM

[ArtfulDodger:]

You are dead on right again, Paul. Excellent comment. Thanks.


On Aug 17 05:11 PM Paul Harper wrote:

> if you look at the majority of ADRs, they are non-exporters / telecoms,
> internet, services etc. Demand remains, therefore (intelligent) investors
> in ADRs are not so tied up in the market risk.
>
> am long on all three major telcos

Aug 18 12:50 PM

[ArtfulDodger:]

Don't agree at all with Bespoke's conclusion: "Chinese ADRs either have further to fall, or else the sell-off in Chinese stocks is overdone."

There are several other conclusions that could be: (1) the two indices are so different as to warrant a difference in price, and thus the higher quality one would fall the least. (2) the type of investor in one could be more steadfast and less likely to dump at the slightest downturn. (3) there are no IPOs on the Shanghai, which of course, makes it less volatile.

Aug 18 12:57 PM

[ArtfulDodger:]

Zenstar666:

I don't buy ETFs, and I'm not sure how much you know about the ADRs. But here are some I own that are still reasonably priced, although I've been in them a while and have quite a profit. You might watch them for future pull backs and a chance to buy.

None of these depends on exports. So they are geared strictly to the Chinese people.

HNP
SOHU
NTES
PWRD
VISN
YZC
CHL

I also own these two that should profit (sooner or later) from China's growth.

HIMX
KHD

The best to your investing. AD


On Aug 18 09:46 AM zenstar666 wrote:

> Anyone know the best way to play the Chinese ADRs? I assume FXI to
> start, but are there any more ETFs that include more than just 25
> mostly state owned companies?

Aug 18 01:06 PM