FXI- New Lows As China Deteriorates
Summary
- President Xi has China on a long-term path for global dominance, rejecting US leadership in the worldwide economy.
- Evergrande is a Chinese property company defaulting on debt. China will most likely not let Evergrande go down. Debt and equity holders could find themselves out in the cold with worthless investments.
- China looks long-term while the US and Europe take a quarter-to-quarter approach to economic growth- Immediate gratification versus the long view has been the core for Chinese success.
- FXI is an ETF that holds the leading Chinese stocks. The share performance may not match the company performance as the regime in Beijing is the ultimate CEO suite.
- We remain short the FXI in the APS portfolio as the trend has not changed.
da-kuk/E+ via Getty Images
Chinese stocks have been under siege since mid-February 2017. Markets reflect the political and economic landscape, which has been bearish for Chinese stocks that trade on the US stock market. The latest all-time peak in the leading US stock market indices came in early September. The high in the iShares China Large-Cap ETF product (NYSEARCA:FXI) was in October 2007.
Chinese stocks offer value for foreign investors based on the comparison to US stocks. Since 2016, the FXI has made a series of higher lows and marginal higher highs from a long-term perspective. However, the ETF remains in a funk at below the $40 per share level.
Meanwhile, since March 2021, every rally has been a sale in the FXI as it continues to make lower highs and higher lows from a medium-term perspective.
An investment in China has substantial political ramifications. China is the world’s second-leading economy and the most populous country on the earth, with over 1.4 billion people. Chinese economic growth has led the world for decades. However, the market’s sentiment remains bearish for the shares of Chinese companies, and the trend is always your best friend in markets across all asset classes.
Some market participants are likely buying Chinese stocks as value plays, but they are going against the trend. Picking bottom can be dangerous as markets tend to fall far lower than reason, logic, and rational analysis dictates during bearish trends.
President Xi gave the sell signal
On July 1, Chinese President Xi Jinping commemorated the one-hundredth anniversary of the Chinese Communist Party with a vision of China’s future. His most aggressive speech to date warned foreign forces that any attempts to “bully, oppress, or subjugate us…will find (itself) on a collision course with a great wall of steel.”
In March 2021, the markets received a signal of China’s increasingly aggressive posture as angry words were exchanged at the first meeting between the new US Secretary of State and Chinese officials in Alaska. Before the contentious meeting, Jack Ma, the Chinese billionaire, founder of Alibaba (BABA), and international media superstar disappeared. When he came back on the scene in early 2021, he was far less outspoken, a sign he was warned or even reprogrammed to tow the party line. Over the past months, Chinese celebrities have disappeared from the internet as the country suppresses fan culture.
The evidence points to a change in China where the country will encourage the “collective” and inhibit the “individual” with room for only one superstar, the party and its leader, President X.
Evergrande could be the tip of the iceberg
A Chinese company that used the US capital markets during its IPO in late June has suffered on two fronts. DiDi Global Inc. (DIDI) ADRs plunged since the day of the stock’s listing.
Source: Barchart
As the chart highlights, DIDI shares traded to a high of $18.01 on the first day of trading on June 1 and fell to a lot of $7.16 per share on July 26. At the $7.58 level at the end of last week, DIDI was not far from the low. Fear of holding Chinese stocks has weighed on the shares, and China’s rejection of using foreign markets to raise capital has likely led to an investigation of the company to “protect national security and the public interest.”
Meanwhile, the latest issue to weigh on Chinese stocks has been the Evergrande debacle. The Chinese property company has a reported $300 billion in debt that could cause systemic risks for foreign investors in China. The government will not likely allow the company to go under, but that does not mean foreign investors and related debt and equity holders will not find themselves will massive losses. Sovereign immunity is a powerful tool that allows for the preservation of assets that are national security and financial imperatives without shielding investors and related businesses from losses.
A different approach to economic and political growth
President Xi made it clear that the government follows a “China First” policy regarding the world and Chinese individualism. China’s approach to economic and political issues differs from the west as the authoritarian government has traditionally taken a long and calculated approach to growth and expansion.
In the US, the private sector takes a quarter-to-quarter approach to profitability and business expansion. Politically, initiatives are typically aligned with election cycles. China looks decades into the future. The political system and President Xi’s lifetime position afford it the luxury of the long view. Since the establishment of the People’s Republic of China in 1949, five men have shaped the CCP. Mao Zedong, Deng Xiaoping, Jiang Zemin, Hu Jintao, and Xi Jinping have been the paramount leaders. Since 1949, the US has had fourteen Presidents. President Xi is the most powerful Chinese leader since Chairman Mao. His goal is to guide China into a new era as the world’s leading economy and military power. He seeks to reunify Taiwan under China’s umbrella. The long-term view allows for sacrificing short-term benefits to achieve the goals. The aggressive plans to surpass the US have pressured Chinese stocks that trade on the US markets.
FXI is the large-cap Chinese equity ETF product
At $38.55 per share, the iShares China Large-Cap ETF product has just under $4.9 billion in assets under management. FXI trades an average of over 25.3 million shares each day and charges a 0.74% management fee. The fund summary states:
Source: Barchart
FXI’s top holdings include:
Source: Seeking Alpha
While the leading US stock market indices all reached record highs in 2021, FXI’s peak came back in 2007 at $73.19 per share.
Source: Barchart
As the chart shows, while the US stock market remains a stone’s throw from the record highs, the FXI ETF at the $38.62 level was over 47% below its high established fourteen years ago. Chinese stocks have lagged the US markets, and that trend continues in 2021, thanks at least partly to President Xi’s plans, leadership, and aggressive stance to the rest of the world. The government calls the shots for China’s businesses, and the entities have complex corporate structures that often make reporting a mirage.
Riding the bearish trend in the APS
On February 17, the FXI hit the high for 2021 at $54.52 per share. Since then, it has been all downhill.
Source: Barchart
As the chart highlights, FXI has made lower highs and lower lows over the past eight months, with the most recent low coming on September 20 at $37.86 per share. At the $38.60 level on October 6, the ETF was not far from the recent low, and the trend remains lower.
As of October 1, the FXI’s bearish trend remains intact. While we are short, we're agnostic when it comes to the past and the future. We only care about the present as the current trend is our only friend. The FXI continued to trend lower at the end of last week, but we will only shift from short to long when we get the signal. We always follow the rules, ignoring all other noise.
When the trend bends, we will be long the FXI again as we're constantly long or short. We never miss a lasting trend. Our approach has no ego and no ax to grind. The market dictates our positions, eliminating stress and emotion from the equation.
FXI is a component of our Algo Portfolio System. The portfolio employs a systematic, algorithmic approach that eliminates emotions and stress from trading and investing. The portfolio consists of only highly liquid stocks and ETF products and is dynamic, programmed, and based on eight decades of combined experience. Portfolio positions can change from long to short or short to long each day, always positioned to catch significant price trends. As of the end of last week, the portfolio will benefit from a bearish trend in FXI shares.
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Andy Hecht and Todd Horwitz
This article was written by
Andy Hecht and Todd "Bubba" Horwitz are partners at Bubba Trading.
Andy has over forty-year experience as a trader and analyst. He is well-known to Seeking Alpha readers. He has been a prolific contributor for years covering markets across all asset classes.
Bubba is a trader and educator with over four decades of experience in the rough-and-tumble futures and options trading pits in Chicago. He appears on all of the major business networks as a contributor.
Together, Andy and Bubba provide an upstairs-downstairs perspective on markets that encompasses a top-down and bottom-up approach to trading and investing. The pair have created proprietary models and systems that remove ego and emotional impulses from trading and investing. An emotion-free approach with Bubba Trading's Algorithmic Portfolio System reduces stress and improves performance, over time. Todd and Andy are collaborating to bring their Algo Portfolio System to Seeking Alpha's Marketplace.
Analyst’s Disclosure: I/we have a beneficial short position in the shares of FXI either through stock ownership, options, or other derivatives. 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.
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