China equities turned in admiral performances last year. That’s because there were hopes that PBOC might delivery wide-ranging monetary stimulus in 2025. Helped by that speculation, the widely followed MSCI China Index notched an early Q4 surge.
The WisdomTree China ex-State-Owned Enterprises Fund (CXSE ) was among the funds that went along for the ride. It ended 2024 with a gain of 8.6%. That’s despite some of the air coming out of the China stimulus trade as the year drew to a close. One reason was that Beijing’s initial stimulus efforts were highly targeted when market participants demand larger, wider-ranging expenditures.
It’s possible the PBOC delivers this year. That would indicate now could be a good time to consider an ETF such as CXSE. That’s because the cooling-off period experienced late last year by China equities has made some CXSE holdings attractive on valuation.
CXSE Could See 2025 Rally
CXSE’s status as an ETF that’s home to some undervalued stocks is particularly noteworthy. That’s because the fund leans into growth stocks. For example, the communication services and consumer discretionary sectors combine for more than 37% of the ETF’s portfolio.
Baidu (BIDU), one of China’s oldest internet companies, is an example of a high-tech name residing in the ETF that has wide moat credentials. And it’s one that’s currently sporting compelling valuations. China’s internet search giant is also making notable strides in AI and cloud computing.
“While Baidu is transforming its identity by investing in generative AI, cloud, and autonomous driving, commercialized success remains to be seen,” noted Morningstar analyst Kai Wang. “There are encouraging signs of its AI cloud monetization growing to 18% of core revenue in 2023 from 12% in 2020. However, despite sharp growth, we expect Baidu to face competition in the cloud from industry [leaders. These include] Alibaba, Huawei, and Tencent, which all have greater market share than Baidu.”
The research firm is also constructive on Tencent, which is CXSE’s largest holding, commanding 9.72% of the ETF’s roster.
Creating a Cost Advantage
“We expect revenue from value-added services to increase at a five-year CAGR of [7%. That’s] primarily due to new game launches and content updates to existing games. We expect revenue generated from advertising to increase at a five-year CAGR of 10%. That would be driven by increases in several [areas. Those are] ad inventory, a shift of marketing budgets to online and social media, and more efficient ad targeting,” said Morningstar’s Ivan Su.
Internet retail giant JD.com (JD), a top 10 holding in CXSE, is another name that could contribute to 2025 upside for the WisdomTree ETF.
“According to our moat framework, a firm with a higher market share can lower unit costs enough to create a cost [advantage. This would apply] to JD Retail in our view. JD has a leading scale in the electronics and home appliance and supermarket [categories. That has] led and will continue to lead to increasing bargaining power against suppliers, thereby reducing sourcing costs,” observed Morningstar’s Chelsea Tam.
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