Chinese markets and stocks fell this week on lighter-than-hoped-for stimulus measures. China’s economic recovery continues to face a number of challenges as global macro growth slows and geopolitical tensions remain elevated. There is second-half opportunity for investors, particularly given the bargain in current valuations of China stocks.
China remains at significantly reduced valuations. Brendan Ahern, CIO of KraneShares, noted in an appearance on CNBC’s Street Signs that investors could purchase every company within the KraneShares CSI China Internet ETF (KWEB ) and still be $55 billion under the market cap of Amazon (AMZN).
China remains attractively priced; as of the end of May, the MSCI China Index’s forward P/E was 9.41. That’s nearly 23% lower than the MSCI Emerging Markets Index and a 97% discount to the MSCI USA Index’s 18.6 forward P/E estimates.
Should geopolitical tensions continue to ease and monetary stimulus grow in China in the second half, there is opportunity to gain exposure at bargain prices now.
A Potential Thawing of U.S. and China Geopolitical Tensions?
Strong rhetoric and what the Council on Foreign Relations deems “contentious” trade policies between the U.S. and China in recent years translated to added risk for foreign investors. It’s caused many foreign investors to underweight China in their portfolios. In an environment of enhanced and complex global risk, China remains a hard sell for many.
Despite ongoing geopolitical tensions between the U.S. and China, noteworthy progress was made in the last week. Secretary of State Antony Blinken visited China in what was largely heralded as a successful visit. It’s the first time a U.S. diplomat has traveled to China in five years, Ahern noted.
Blinken’s visit could potentially represent the beginning steps of a thawing of communications between the two countries. Ahern referred to the agreement of senior Chinese officials visiting Washington in the coming months as a positive indicator.
“Geopolitical has kept many institutional investors on the sidelines,” Ahern said. These investors remain underweight on China as they wait for stronger signals. These signals could solidify further in the second half should the two countries keep high-level lines of communication open.
Choppy Recovery and Underwhelming Stimulus Measures
China’s reopening remains stuttering, and the potential of a bull run in the country dried up in the first half. Hopes of strong stimulus measures this month to support domestic consumption and economic growth fizzled on the news of the 10 basis point cut to the one-year and five-year loan prime rates this week.
Markets took China’s cautious monetary approach negatively, declining for the week. Market holidays likely heightened market movement on lighter trading volumes. That said, the Chinese government is taking action regarding monetary stimulus alongside supportive rhetoric, a trend likely to continue in the coming months.
Disappointment in perceived underwhelming stimulus overshadowed what Ahern views as significant news for Alibaba. The firm announced it would spin off into six different branches earlier this year. This week’s announcement concerned leadership shakeups and major names stepping up to helm each business unit.
“I think it’s a positive, I just can’t really explain why investors aren’t coming into the names based on some of the fundamentals,” Ahern admitted.
KraneShares offers a number of China-centric ETFs for investors looking to capture companies with solid fundamentals at bargain prices. These include the KraneShares CSI China Internet ETF { % etf KWEB %} and the KraneShares Bosera MSCI China A Share ETF (KBA ).
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