This article was originally published on ETFTrends.com.
Trade wars have been a major market mover for Chinese equities and if investors can look past the news headlines to zero in on value, China-focused ETFs like the Direxion Daily CSI China Internet Index Bull 2X Shares (CWEB) could be a double-down play as the shift from U.S. equities becomes more apparent heading deeper into the late market cycle.
CWEB seeks the daily investment results equal to 200% of the daily performance of the CSI Overseas China Internet Index. The fund is comprised of assets that track the index and other financial instruments providing daily leveraged exposure to the index or ETFs that track the index, which is designed to measure the performance of the investable universe of publicly traded China-based companies whose primary business or businesses are in the Internet and Internet-related sectors.
By cornering a specific area of the technology sector, the internet, CWEB can capitalize on an industry that continues to see increased investor interest. Even if tariffs are dominating the headlines, there are also stories, such as Chinese IPO Meituan Dianping, the country's largest on-demand food delivery service, raising $4.2 billion--a sign that investors are still bullish on the internet economy in China despite a recent tech sell-off.
Furthermore, the capital markets may have received an early smoke signal that the current bull run in U.S. equities might be stopping for air as the latest consumer price index numbers showed inflation rose at a slower pace than expected. During this bull run that has seen a heavy emphasis on growth-oriented plays, U.S. equities have been the default maneuver, but that may change with a steady shift to value, which could benefit China.
While the stock market has been largely tepid this week, trade talks between the U.S. and China are set to resume as both economic superpowers are said to be working on a plan that will include a new round of negotiations to end their trade disputes. Treasury Secretary Steven Mnuchin reportedly sent an invitation to Chinese officials, proposing a meeting to discuss trade issues--a positive sign for CWEB.
"Everything's been pro-U.S.--people moving away from investing overseas, especially emerging markets--areas like China," said ETF Trends publisher Tom Lydon on an interview with Fox Business. "However, Trump's done a good job as far as trade talks in Europe, in Mexico, in Canada they're making some progress there, but the holy grail is China."
If investors begin to hone in on value, China-focused ETFs could get a reprieve from their year-to-date doldrums like the iShares China Large-Cap ETF (FXI) --down 4.25% year-to-date, iShares MSCI China ETF (MCHI) --down 8.29% YTD and KraneShares CSI China Internet ETF (KWEB) --down 13.51% YTD. CWEB itself is down 15.92% YTD as a result of its double leverage, but that could change moving forward.
While the two economic superpowers have locked horns on trade, the renewed talks could give a much-needed boost to China-focused ETFs and even emerging market ETFs. With respect to value compared to price, many of these ETFs from abroad present a profitable opportunity that can be realized, especially if China and the U.S. ameliorate their trade differences.
"When you look at areas like China and the emerging markets, that's been the weakest area around the world this year," said Lydon. "However, the values are there--you look at P/E ratios around 11 versus 18 here in the U.S."
"There's a lot of smart money coming in where people are saying 'You know what? I think there's enough momentum where we're actually going to see some progress,'" added Lydon. "And if we do, these undervalued stocks are going to take off."
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