China’s economic recovery following a brutal three years of Covid restrictions and crackdowns on the property sector and internet companies has underwhelmed investors to the point that many have pulled back. That pessimism could set Chinese stocks up for a better run if Beijing’s intensified efforts to stabilize its economy take hold.
The longer-term outlook for China is still doubtful. The economic outlook is clouded by the country’s aging population. Mountains of debt keep Beijing from rolling out the aggressive stimulus of past years. And a more interventionist approach by Xi Jinping and tension with the U.S. have dented business and investor confidence.
But Chinese officials are focused on trying to put a floor under the world’s second-largest economy, creating a potential short-term opportunity. In a note to clients this past week, Goldman Sachs Asia Pacific strategist Timothy Moe said that at the July meeting of the Politburo, Chinese officials vowed to do more to help the economy, including supporting consumption and further reducing restrictions on home purchases. Moe and his team expect economic growth to rise from 3.2% in the second quarter to 5.5% in the third quarter and 5% in the fourth quarter as Beijing takes action.
While aggressive stimulus is still unlikely, more downbeat economic news could force Chinese policy makers to do still more to allay wariness in the private sector and find ways to entice consumers to spend more. The concern is that there could be more signs of the recovery losing momentum: July data from independent research firm China Beige Book showed that spending on goods like autos and luxury products is growing more slowly. Chinese factory activity slipped back into contraction mode as export orders fell. And the next batch of data in the third quarter is unlikely to provide much of a catalyst for stocks—or raise much hope about the economy, according to TS Lombard analysts.
But the fourth quarter could bring some relief on the economic data front as Beijing’s efforts to revive confidence gain traction. Its economy is likely to get another lift as some of the infrastructure spending and real-estate measures the government has been putting in place begin to bear fruit.
If Beijing does do more, stocks could get a lift toward the end of the year, TS Lombard analysts say in a recent client note. Investors are generally pessimistic now, so signs that the economy is going to get better could bring in a flurry of buying. And Chinese stocks have plenty of room to rise: The iShares MSCI China exchange-traded fund (
MCHI
) is down about 3.3% over the past year at $47.95, not far from the low of $42.65 reached last summer, when concern about the economic damage from the fight against Covid was at its worst.
Barron’s took a look at ways for investors to benefit. We screened MorningstarDirect’s list of diversified emerging-market funds for those with at least a five-year record and $500 million in assets that were still open to new investors and had more exposure to China than the 30% the MSCI Emerging Markets index has allocated to the country.
Our screen turned up eight funds, some of which have hefty minimums but should be accessible through financial advisors. Their relatively heavy allocations to China have hurt them in recent months, but could be an advantage into the end of the year.
| Fund Name / Ticker | AUM ($mil) | YTD Return (%) | % in China |
|---|---|---|---|
| Emerging Markets Growth Fund / EMRGX | 1,519 | 13.5 | 39.58 |
| Invesco FTSE RAFI Emerging Markets ETF / PXH | 1,273 | 13.46 | 37.45 |
| Fidelity Advisor® Focused Emerging Markets Fund / FIMKX | 3,355 | 10.95 | 32.55 |
| Schwab Emerging Markets Equity ETF / SCHE | 8,517 | 9.82 | 32.53 |
| Virtus Vontobel Emerging Markets Opportunities Fund / HIEMX | 1,593 | 5.05 | 32.35 |
| Schwab Fundamental Emerging Markets Large Company Index ETF / FNDE | 4,910 | 14.62 | 32.29 |
| Goldman Sachs ActiveBeta® Emerging Markets Equity ETF / GEM | 975 | 11.57 | 31.77 |
| Goldman Sachs Emerging Markets Equity Insights Fund / GERIX | 1,886 | 12.85 | 31.34 |
Note: Limited availability to new investors.
Source: MorningstarDirect.
Emerging Markets Growth Fund (EMRGX), part of Capital Group’s vast lineup, ranks among the cheapest quintile of all emerging-markets funds with an expense ratio of 0.67%, according to Morningstar. The fund’s biggest position is in
Taiwan Semiconductor Manufacturing
(TSM) but the bulk of its top 10 holdings are Chinese companies. On the list are the biotech
BeiGene
(BGNE) and travel-oriented stocks like the hotel company
H World Group
(HTHT) and
Trip.com Group
(TCOM). The fund also has 3.6% in cash, according to Morningstar.
Another cheap fund is the
Invesco FTSE RAFI Emerging Markets ETF
(
PXH
), with an expense ratio of 0.49%. The internet companies
Alibaba Group Holding
(9988.HongKong) and
Tencent Holdings
(700.HongKong) are among its top 10 holdings, along with
Ping An InsuranceCo.
of China (2318.HongKong).
The Fidelity Advisor Focused Emerging Markets Fund (FIMKX) charges more, with an expense ratio of 1.03%, but it has returned an average of 5.7% a year over the past decade, beating 97% of its diversified emerging-markets peers. It has a heftier allocation to Tencent Holdings and
China Life Insurance
(2628. HongKong) than its peers, which helped the fund’s performance in the first quarter and could do so again if the economy regains momentum.
Write to Reshma Kapadia at [email protected]
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