I bought 1500 shares of the iShares FTSE/Xinhua China 25 Index ETF (NYSEARCA:FXI) on the first trading day this year. So far, my loss is like a house down payment. However, I still like FXI. Here is why:
(1) Most people agree that FXI will be a winner again this year. I am just following the crowd. There are many reasons I need to follow this crowd. Globally, ASEAN and China will sport the biggest growth this year. North America and Europe are expected to grow by 2-3 %. In addition, Chinese currency is under pressure to appreciate.
(2) The primary reason FXI is under pressure here in New York is because our own market is unpredictable this year. Last year, the Dow retreated if the oil price went up. This year, the DOW retreats even if the oil price goes down. The Dow and S&P are just looking for a reason to go down. Under the circumstance, you need something that is going to go up.
(3) Most of arguments against FXI are incorrect. For example, some argue that Chinese stocks are overvalued in Shanghai. Therefore, in their view, it is overvalued in New York. Some people even use P/E ratio to support the argument. As a matter of fact, FXI includes the top 25 Chinese companies listed in Hong Kong. As for Shanghai, the overvaluation is created because of tight supply of equities of this state sponsored monopoly. The situation is similar in N.Y.; we don't have enough Chinese companies listed here. We need to share the returns of Chinese growth.
(4) The risks with investing in China have been over blown for decades. Without listing every one of them, suffice it to say that China has been growing at double digits at the same time. I will also point out that we don't have a standard metric to compare risks. Over stressing one at the cost of concealing others is not being honest with ourselves.
(5) International equity valuation is set globally. The trend is that Shanghai evaluation is going to drive up the Hong Kong valuation of FXI, and the Hong Kong valuation is going to drive up our valuation of FXI. This artificially depressed valuation will eventually hurt our own investment.
I have always enjoyed the opportunity of trading in the world's largest market. As a small time investor, I win with whomever wins. The Japanese have a similar view. Right now, they own all the important nuclear power equipment providers in the world. Japan stands to profit regardless who wins the nuclear power project. By investing in FXI and others, I hope this small time investor can share a piece of the global pie.
FXI 1-yr chart
Disclosure: Author is long FXI.