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Why These Chinese Sector ETFs Are Crushing S&P 500 in 2019

Sanghamitra Saha

Slowdown fear has engulfed the Chinese market of late, but several Chinese sectors and stocks are flying high this year. Signs of a resolution to the year-long U.S.-China trade spat is acting as the main tailwind (read: What Led China ETFs Outperform in Q1 & Have More Room to Run).

In late February, President Donald Trump first postponed the increase of tariffs on about $200 billion worth of Chinese goods and most recently, the Financial Times reported that top U.S. and Chinese officials have resolved most of the issues pertaining to trade conflicts.

Apart from this, reformative measures taken by the Chinese government is creating further opportunities in the equity markets. The Chinese government has left no stone unturned to shore up the slowing economy.

The government announced a cut in the value-added tax (VAT) for the manufacturing sector to 13% from 16%, and VAT for the transport and construction sectors to 9% from 10%. The government will also cut social security fees paid by companies to 16%. All these tax cuts are worth about 2 trillion yuan for the year.

Against this backdrop, below we highlight three sector ETFs that have been hovering around a 52-week high level. These sector ETFs have returned double the S&P 500 (up 14.8%) in 2019.

Healthcare

The Chinese biopharmaceutical and healthcare industries are bubbling with opportunities right now. China is a big market with about $1.26 billion population, which has always been a point of interest for both Chinese and Western providers of drugs.

The country was the world's second-largest pharmaceutical market in 2017???worth $122.6 billion, after the United States. It is also the biggest emerging market for pharmaceuticals with growth expected to reach $145 billion to $175 billion by 2022, per  healthcare information company IQVIA (read: Explore China's Booming Biopharma Space With This New ETF).

As part of Beijing’s “Made in China 2025” industry plan, President Xi Jinping acknowledged the pharmaceutical sector as one to work on, with focus on innovation, and domestic research and development.

Global X MSCI China Health Care ETF CHIH (up 31% this year) and Loncar China BioPharma ETF CHNA (up 30.4%) are the two ETFs to tap this boom.

Real Estate

Including the latest 100 bps cut being enacted in January, China has cut commercial lenders’ reserve requirement ratio (RRR) five times to make borrowing easier for small and private firms. China’s successive RRR cuts and VAT cut for the construction sector have probably promoted liquidity in the real estate market. Also, China’s efforts to promote urbanization have boosted property developers. The government aims to increase China's urbanization rate by at least 1 percentage point by the end of this year.

The housing market of China thus seems to have maintained its stable development. Chinese property developers ruled the issuance of U.S. dollar-denominated junk bonds in the first quarter of 2019, according to a report by research firm CreditSights. BlackRock, Pimco and UBS are of the opinion that high-yield bonds by Chinese property developers are attractive investments for 2019. No wonder, Global X MSCI China Real Estate ETF CHIR is up 31.8% this year (as of Apr 9, 2019).

Consumer Staples

Policy easing in the economy and growing urbanization must have boosted staples stocks of late. Also, the sector is recession-proof in nature and is thus a welcome investment at a time of economic slowdown. Global X MSCI China Consumer Staples ETF CHIS has gained 33.8% this year (read: Top and Flop ETF Areas of March).

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Loncar China BioPharma ETF (CHNA): ETF Research Reports
 
Global X MSCI China Consumer Staples ETF (CHIS): ETF Research Reports
 
Global X MSCI China Real Estate ETF (CHIR): ETF Research Reports
 
Global X MSCI China Health Care ETF (CHIH): ETF Research Reports
 
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