Broadly speaking, Chinese equities and the related exchange traded funds disappointed investors this year, but there’s a growing sense that 2024 could bring better things for this asset class.
If accurate, that prediction would be good news for investors with exposure to the world’s second-largest economy. Still, how that exposure is attained will be meaningful in 2024. With some market observers speculating that major Chinese equity indexes are likely to merely perform in-line with emerging markets gauges next year, being tactical in China could be the best way for investors to tap into out-performance opportunities.
On that note, the KraneShares CSI China Internet ETF (KWEB ) and the KraneShares Hang Seng TECH Index ETF (KTEC ) could be winning ideas among China-specific ideas. One reason KTEC and KWEB could be among the leaders of a 2024 China ETF resurgence is that many experts prefer growth stocks over value names as avenues for playing a China rebound. Good news: These ETFs have other tailwinds.
Why KTEC, KWEB Could Shine in 2024
In recent years, some market participants arguably focused too heavily on pure beta avenues for China exposure, ignoring more tactical fare such as KTEC and KWEB. Particularly with this year’s disappointing showings by Chinese assets, those investors were left disappointed and wary of reengaging with the asset class.
However, frustration shouldn’t blind investors to opportunity. Robin Xing, Morgan Stanley’s Chief China Economist, recently noted that China’s equity market remains ripe with opportunity. It’s merely a matter of market participants focusing on the right traits. Some of those characteristics, including strong return on equity (ROE), are accessible via KTEC and KWEB.
“There are still plenty of alpha generating opportunities and particularly high quality names in the growth categories who can offer a strong earnings and ROE track record, good management teams and limited reliance on foreign technology input or on domestic government policy support,” observed Xing.
Interestingly, while growth stocks, regardless of home domicile, often have a reputation for above-average volatility, some KTEC and KWEB holdings could serve to reduce investors’ vulnerability to some of the turbulence associated with investing in China.
“We believe those names can offer strong downside protection and help minimize your portfolio’s volatility, while also offer the upside from their respective growing sectors when the market turns around. We have put together selected names that we believe meeting these criteria, and we call them the China best business model,” concluded Xing.
Plus, many Chinese growth names, including plenty residing in KWEB, trade at noticeable discounts relative to U.S. peers.
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