CHIQ: China's Consumer Discretionary Sector Headed For Major Speedbumps

Summary

• China's consumer discretionary sector has seen extreme gains over the past few months as investors pile into the only major area of global economic growth.
• China's consumption has grown at a fast pace over the past decade, but growth has decreased substantially over the past few years as its housing market becomes unstable.
• Recent surprise defaults of AAA-rated state-owned-enterprises have sparked fears of hidden widespread risks in China's major corporations.
• Despite risks, valuations of China's major consumer discretionary companies have nearly doubled this year.
• The China consumer discretionary ETF CHIQ's performance may reverse soon as the PBOC looks to stop the Yuan's rise and the U.S. flirts with delisting Chinese firms.

(Pexels)

China has been a long-term favorite among many emerging market investors who are looking to gain exposure to the world's dominant growth market. The nation has been growing at a rapid pace in recent years, though there has been a slight slowdown recently. Additionally, its equities are relatively cheap with "P/E" valuations usually half or lower than is seen in the United States. While the country was the source of COVID-19, it is one of the few that is actually expected to grow its GDP this year.

Most companies in China have not had stellar performance over the past decade, but this situation has caused a breakout. Recent returns have been particularly strong for the country's consumer discretionary sector as we can see through the MSCI China Consumer Discretionary ETF (NYSEARCA:CHIQ) by Global X. As you can see below, CHIQ is outperforming the more-popular China ETF (FXI) by a significant extent:

The breakout in CHIQ is not dissimilar to the breakout in technology and growth stocks over the past few months in the U.S. The ETF is currently up a staggering 75% this year and is gaining investor interest as it continues higher. That said, after taking a closer look at the fund we can see that it is not without risk, particularly given the exuberance surrounding its holdings.

Can China's Middle-Class Continue to Grow?

CHIQ invests in large and mid-cap segments of the MSCI China Index that are classified as consumer discretionary. This includes companies like the EV producer NIO (NIO) (8.7% of assets), JD.Com (JD) (8.3% of assets, E-Commerce), and Alibaba (BABA) (6.4% of assets, E-Commerce). Other significant holdings (in the top ten) include the education companies New Oriental (EDU) and TAL Education Group (TAL), Pinduoduo (PDD) (E-commerce), and Yum China Holdings (YUMC) (fast food).

CHIQ's core

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, but may initiate a short position in CHIQ,FXI,BABA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.