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Why the Year of the Pig May Be a Good Year for China ETFs

This article was originally published on ETFTrends.com.

As the Chinese New Year is ushered in, investors may also want to take a second look at China's markets and country-specific ETFs to capture a potential rebound in this emerging economy.

"To be sure, there are many reasons to be cautious with respect to China. It is easy to imagine trade tensions reigniting or the economic data disappointing. But the outlook for China is still promising and the performance this year reflects that," Christopher Dhanraj, Head of iShares ETF Investment Strategy, said in a recent note.

China is up more than 8% this year, compared to the 5.6% gain in the S&P 500, and BlackRock sees three factors that could continue to support the outlook for Chinese equities in the year ahead.

Specifically, Dhanraj highlighted easing trade frictions. The U.S. and China have agreed to a ceasefire in the trade war that gripped global markets last year, and the two are back at the negotiation table to find common ground.

"Although tensions are not likely to go away over the long term, we see room for trade frictions to subside in the short run. Both sides have incentives not to escalate the conflict and December’s market volatility in the U.S. stock market has led to wider recognition that trade tensions could hurt domestic business confidence and employment," Dhanraj said.

The strategist also projects more stimulus to come in 2019 as Chinese policymakers have rolled out a number of monetary, regulatory and easing measures to support growth and assuage anxious investors after the trade tensions and growth slowdown. For example, China recently announced 1.3 trillion yuan, or $193 billion, in new measures like tax cuts and reduced tariffs. Dhanraj argued that other policy implementations such as greater financial market openness, private sector support and infrastructure spending could continue to support growth and bolster Chinese markets.

Additionally, the Chinese markets now look more attractive on a valuation standpoint. China's equity market trade at a forward price-to-earnings of 10.6 from the 2018 high of 14.8. The strategist also pointed out that corporate earnings look more stable as the economy shifts towards domestic consumption from its reliance on foreign exports.

Investors who are interested in accessing the Chinese markets have a number options to choose from. For example, the iShares China Large-Cap ETF (FXI) tracks 50 of the largest Chinese companies listed through Hong Kong, which includes a heavy tilt towards the financial sector. The iShares MSCI China ETF (MCHI) , which tracks the MSCI China Index, takes a broader approach and includes large tilts toward communication, financial and consumer discretionary names. Additionally, the iShares MSCI China A ETF (CNYA) allows investors to gain access to Chinese mainland listed company stocks or the China A-shares market.

For more information on the Chinese markets, visit our China category.

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