It’s understandable that some investors are skittish about Chinese stocks. Price action over the past couple of years has confirmed those concerns. However, green shoots could be emerging for financial markets in the world’s second-largest economy, indicating that it could be a good time to revisit exchange traded funds such as the KraneShares Bosera MSCI China A Share ETF (KBA ).
China’s economic recovery has been hindered by Beijing’s insistence on a zero-COVID policy. As admirable as that is, signs are emerging that policymakers may be focusing more on mitigation than elimination.
“The emphasis in official communications is now more on the need to increase vaccination among older people (especially those aged 80 or older), as well as improving healthcare and hospital facilities and stockpiling anti-Covid medications,” noted BNP Paribas. “China has re-calibrated its Covid controls. We have long argued such steps would bolster both the public’s and the authorities’ confidence in tackling the epidemic. The increase in vaccination rates and expansion in Covid-specific medical capacities can be seen as signposts confirming an eventual exit from the ZCP.”
As a broad-based play on mainland-listed Chinese equities, KBA could benefit from easing or outright elimination of the zero-COVID policy. The $568.6 million KBA held 98 stocks as of the end of October and has a value tilt, as highlighted by a third of the fund being directed to financial services and industrial stocks. The consumer staples and technology sectors combine for 28.41% of the fund’s weight. Additionally, the KraneShares ETF could be supported by policy changes in 2023.
“If the policy changes are implemented well, 2023 GDP growth could surpass the prevailing market consensus prediction of less than 4.0%,” added BNP Paribas. “Easing Covid restrictions should boost consumption and augment the growth momentum from increased production and investment. A more stable property market could also help improve consumption and investment.”
Of course, there’s also the long-running linkage between U.S. and Chinese markets, which is to say that if the Federal Reserve softens its stance on interest rate hikes in 2023, Chinese equities and KBA could benefit.
“Most investors are tactically underweighting China. Portfolio flows could return to China in 2023, boosting the yuan/US dollar (CNY-USD) exchange rate, as sentiment shifts away from the current extreme pessimism,” concluded BNP Paribas. “The stars may well be aligning for China’s recovery.”
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