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4 Beaten-Down China ETFs That Could Rebound in 2020

Sanghamitra Saha

Many investors have been wary of Chinese stocks and ETFs this year due to trade tensions. Further, protests in Hong Kong turned investors away from China investing. iShares China Large-Cap ETF FXI was almost flat in the first nine months of 2019

However, things are finally looking up on the trade front. The fund FXI gained 8.4% in the fourth quarter on trade deal hopes. Investors should note that after wrangling for almost two years, the United States and China decided to strike a preliminary trade deal, which is expected to be signed in early January.

Terms of the deal include a delay in new tariffs on $160 billion worth of Chinese-made consumer electronics and toys,slated to be levied on Dec 15, and a reduction by half in existing U.S. tariffs on $360 billionof Chinese products. China made a commitment to buy $40 billion (arguably) of American agricultural products annually, tighten measures for protecting American intellectual property and stop forcing American companies to transfer their technology while doing business in China.

Monetary policy has been easing in China as the government seeks to boost growth. The People’s Bank of China slashed a key interbank interest rate on Nov 18, marking the first such easing since 2015. This apart, China’s central bank announced several cuts in reserve requirement ratios (RRRs) this year to release billions of yuan for some small and medium-sized banks.

Not only monetary policy, Beijing is beefing up fiscal stimulus also with the state planner recently approving eight fixed-asset investment projects in November worth of a combined 7.1 billion yuan. The move was to fight the pressure building from escalating U.S. tariffs and sluggish domestic demand.

Major index providers are raising the weights of China A-shares in their global benchmarks, which will lead to inflows of billions of dollars into those stocks. Global index compiler MSCI Inc. increased the weights of China A shares in certain indexes by hiking the inclusion factor to 20% from 15% late November onward. MSCI added China A shares to its widely tracked indexes for the first time in June 2018 while other index providers like FTSE Russell and S&P followed suit.

How Did China ETFs Perform in 2019?

Despite the ebb and flow in trade war, Chinese consumer and technology sector outshined in the year with related ETFs returning in the range of 43-49%. And the most laggard has been Invesco CurrencyShares Chinese Renminbi Trust (FXCH).

Against this backdrop, below we highlight a few China ETFs that have been under pressure in 2019 but are up for stellar gains in 2020, courtesy of trade optimism.

Global X MSCI China Financials ETF CHIX

The financial fund has been up 15.4% this year so far and has further added about 7.4% in the past week. Some upbeat Chinese economic data pertaining to the industrial productivity and retail sales hints at an uptick in activity. Thawing trade woes should again support activities in the financial sector. The sector also has low valuations. This Zacks Rank #3 (Hold) fund’s 30-Day SEC yield is 2.76% annually.

Global X MSCI China Communication Services ETF CHIC

The fund has risen 4.8% year to date and has gained 6.1% in the past week, reflecting the trade truce. Per Global X, Communication Services ranks as the third largest GICS sector in China by market cap, of which Interactive Media & Service takes the maximum exposure of 37%. A relief in the trade tiff is a great boon to this space. Two key holdings of the fund, Baidu and NetEase, sport a Zacks Rank #1 (Strong Buy) (read: US-China Truce Talks Begin: ETFs to Shine).

iShares China Large-Cap ETF FXI

The fund has jumped 12.9% this year so far and has gained 6% past week. The fund is heavy on financials (45.86%) followed by communication (17.15%) and consumer discretionary (10.88%). The fund should reflect the broad-based strengths in Chinese securities during 2020 (read: Top Foreign ETFs of 2019).

Global X MSCI China Industrials ETF CHII

Factory activity in China surprisingly returned to growth in November for the first time in seven months. This sector was worst hit by the trade tussle and may thus stage a turnaround in 2020. Low rates and the government stimulus may offer some additional breather. The fund has inched up 3.8% in the year-to-date time frame and has gained 5.4% in the past week.