Stocks in China are soaring.
The ETF tracking the FTSE/Xinhua China 25 Index, the FXI, is up 5 percent over the last five trading sessions after improved economic data, including HSBC’s July factory activity reports.
Does that mean the FXI is a buy?
Not according to Mark Newton, chief technical analyst at Greywolf Execution Partners. “It’s been up over 9 percent above the trend line that has guided this over the last few months,” he said. “At current levels, it’s gotten a bit extended.”
A longer-term look at the charts show the stock is still trading below where it was a couple of years ago. “As it gets up near this area around $41.50 - $42, my thinking is there’s a good chance this stalls out being that we’re reaching these former highs,” Newton said. “Short term, [it is] overbought. And the overall chart is still very much neutral.”
Gina Sanchez, founder of Chantico Global, is also not enthusiastic about the FXI. She sees a fundamental reason why the ETF trades at around 8 times its forward earnings while the S&P 500 trades closer to 18 times. This is despite IMF projections of China’s GDP growth rate hitting around 7.4 percent this year compared with a revised U.S. growth rate of 1.4 percent.
“What’s going on here is that we know there’s an enormous bad loan problem in the banks,” explained Sanchez, a CNBC contributor. “What everyone has been watching and waiting for is whether or not China will have a hard landing.”
She notes that the Chinese government has implemented rules to avert a banking crisis, including permitting banks to sell preferred shares, cutting reserve requirements and roll corporate debt.
“This problem really does exist and China is making moves to try to avoid that kind of a default scenario,” Sanchez said. “So I think right now [the FXI] is trading cheap for a reason.”
Investors should keep an eye on government policy in China, cautions Sanchez, “But there is a risk out there and it’s a fat tail risk.”
To see the full discussion on the FXI, with Newton on the technicals and Sanchez on the fundamentals, watch the above video.