News of China’s reopening saw its stocks rally 60% in three months late last year (black line). But a good deal of that early optimism has since faded, with the market stabilizing 13% lower from its peak in January (as the chart shows). There are plenty of good reasons for the pullback: investors were concerned about the recovery’s slowing momentum, longer-term foreign technology bans and restrictions, labor market pressures, and low private sector confidence. That said, there are also still plenty of reasons to be excited about investing in Chinese stocks…
Firstly, the Chinese government is all-in on driving growth and has lightened up on regulation. During the China Development Forum this week, a top Chinese official reassured foreign businesses that the economy will open up further, a message that came just shortly after the launch of the “Invest in China Year” campaign.
Secondly, although China’s 5% growth target for this year may look modest compared to its past years, that kind of growth would still be significantly stronger than what developed economies like the US or Europe are likely to see. China’s distinct economic and policy cycles relative to the rest of the world also mean the country is less impacted by financial contagion and economic slowdown risks, and can provide good diversification to your portfolio.
Lastly, despite that rally last year, Chinese stocks are still cheap. The benchmark MSCI China Index is trading at just ten times price-to-earnings ratio compared to 18 times by the S&P 500. Furthermore, most foreign investors don’t allocate a lot of their portfolio to Chinese assets, so price risks for the country’s stocks are skewed to the upside, if there are any positive economic surprises.
No, investing in China is not risk-free. And, yes, as investors, we’re always looking out for opportunities to increase or maintain our returns, at lower risks. But the Chinese stock market may present that opportunity because its benchmark index is not only cheap, it’s also a lot more diversified than its economy. Consumer discretionary and communication services sectors now take up more space in the index compared to before, and these present attractive growth opportunities for investors. To invest, you could consider the iShares MSCI China ETF (ticker: MCHI; expense ratio: 0.58%), or take a more active approach by investing in the JPMorgan Active China ETF (JCHI; 0.65%).
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