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ETF Plays for a Rebounding Chinese Market

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Investors may still find opportunities in China country-related exchange traded funds.

Despite tackling the coronavirus pandemic and ongoing geopolitical tensions with the United States, the emerging economy is recovering after its early shutdowns to contain COVID-19 infections.

As investors look for ways to play the rebound, investment bank Morgan Stanley recommends being overweight China A-shares, or Chinese shares that are traded on mainland indices, CNBC reports. The analysts argued that valuations in China A-shares have usually pulled back the least in response to U.S.-China tensions.

“The A-share market also has very limited foreign ownership representation,” Morgan Stanley said.

Morgan Stanley pointed out that is only about 4% of the market capitalization for A-share stocks, compared to at least 35% for the MSCI China index.

ETF investors may look to something like the Xtrackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR), which tracks the CSI 300 Index or the top 300 stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange.

In comparison, the largest China-related ETF, iShares MSCI China ETF (NasdaqGM: MCHI), tracks the MSCI China Index, which includes A-shares, and also includes a heavier tilt toward H-shares, or Chinese company shares that trade on the Hong Kong exchange, along with U.S.-listed Chinese companies.

Since China was among the earliest to reopen its economy after broad shutdowns to quarantine the coronavirus outbreak, the emerging economy is also seeing residents resume normal activities outside their homes. This normalization of social activities “remains well on track,” according to Morgan Stanley.

Consequently, Morgan Stanley analysts raised their rating on consumer durable stocks to “equal weight”, and it anticipates less downward pressure on earnings for industries related to consumption and services.

ETF investors can also capture the rebound in consumer spending through sector-specific ETF plays, such as the Global X MSCI China Consumer Discretionary ETF (CHIQ), which covers consumer-related companies including rising e-commerce giants.

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

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