After spending nearly two years tumbling due to Beijing’s crackdown on consumer internet and online education firms, among others, the is on the mend. Up 12.34% over the past month, the bellwether China internet fund doubled off its October lows.
Still, the KraneShares exchange traded fund has a long way to go to recoup previous glory. Investors shouldn’t be put off by that fact. Rather, it could be a sign that although KWEB is surging, more gains may lie ahead because the China internet space could be one of this year’s more notable redemption stories.
Indeed, a variety of factors could bode well for more KWEB upside this year. For example, with economic growth expected to slow in developed markets with some of those jurisdictions potentially sliding into recessions, China’s expected GDP growth, albeit modest, could stand out on a relative basis. Importantly, there’s growth to be had in China’s internet industry, confirming the allure of KWEB.
“Growth in China’s internet sector in 2023 will depend in part on the path of zero COVID easing. Strategic initiatives such as cloud services are promising, but still long away from being significant contributors to the bottom lines of companies. As such, China’s leading internet platforms are reliant on consumer demand,” noted KraneShares in a recent report.
With direct ties to Chinese consumers, KWEB holdings are also levered to the country’s reopening story. China is relaxing safety protocols implemented during the coronavirus pandemic, which could foster more discretionary spending, increased levels of leisure travel, and more. Plus, KWEB investors don’t have to pay up on valuation to access those perks.
“Recent earnings have been overwhelmingly positive due to pessimistic expectations. Earnings estimates for 2023 have been revised, and reopening will help a great deal with internet earnings. Positive earnings have helped China’s internet platforms narrow the valuation gap with their US peers this year, which could continue into 2023,” added KraneShares.
It’s also worth remembering that the most recent bear market endured by KWEB wasn’t a commentary on the fundamentals of the ETF’s holdings, but rather the result of the aforementioned regulatory clampdown. With KWEB members having taken the steps necessary to assuage Beijing, regulatory headwinds should be significantly lower for the fund this year.
“Indeed, we believe China’s internet ecosystem as a whole may enter a phase of more sustainable growth. China has been over the internet regulatory hump that many developed economies are only just beginning to contend with,” concluded KraneShares.
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