The drama in North Korea continues this week, with — what else! — a threat from our Tweeter in Chief.
Soon after Donald Trump warned he would “totally destroy” North Korea in a divisive speech before the United Nations, he took to social media to warn the nation’s leaders would “not be around much longer” if they continue to pursue missiles and a nuclear program.
These events adds to the increasingly long list of worries that U.S. investors now face. But despite the risk of geopolitical unrest in Asia, the region still appears to be an appealing place to invest, particularly in North Korea’s neighbor to the north — China.
Some may think it’s crazy to invest in the region after recent rhetoric. And others may think it’s insane to give up on the S&P 500 SPX, +0.41% as it continues to set new all-time highs.
But on the former point, Hong Kong’s Hang Seng Index has shrugged off recent political tensions fairly easily and is actually outperforming the S&P handily in 2017. And on the later, it’s important to remember that the U.S. is far from perfect itself: its stock market is looking shaky; job and wage growth is slowing; and the market has once again overestimated how much profit corporations are actually taking in.
There is never a clear signal for investors to move their money. But if you look deeper, you may find some compelling reasons to consider investing in China right now, North Korea or no.
Red-hot performance: Since Jan. 1, the Hang Seng HSI, +0.47% is up 25% and the more broad-based Asia Dow Index ADOW, -0.40% is up about 18%. (The more established Hang Seng index based out of Hong Kong is a true proxy of market interest in Chinese corporations than the Shanghai Composite SHCOMP, +0.05%which is dominated by domestic retail investors in China, and thus more prone to short-term volatility.)
The biggest Chinese names trading on U.S. exchanges are doing amazingly well. Alibaba Group BABA, +0.06% is up over 90% year-to-date and Baidu BIDU, +1.54% is up 45%. Outside of tech, hotelier China Lodging Group HTHT, +4.21% is up over 130% and $15 billion manufacturing play Aluminum Corp. of China ACH, +3.71% has more than doubled.
Of course, past performance is no guarantee of future returns — and both the Hang Seng and the Shanghai Composite have struggled to move higher since August.
Clearly no credit crisis: There has been a great deal of fearmongering over the years about how China is in a credit bubble and that a “hard landing” is inevitable. Not only has the dreaded debt crisis not happened, but the reality is that 2017 is seeing tremendous demand for emerging-market debt. The New York Times recently reported that debt sales from emerging-market corporations has topped $342 billion through the third quarter, with China representing 27% of that total. It hardly sounds like a crisis when debt is cheap and the West is eager to lend to Chinese companies.
Growth is beating expectations: China topped GDP estimates in the first half of 2017 with a 6.9% expansion rate. That was a significant beat after soft 2016 data rattled some investors, and the details show both imports and exports beat expectations, too. Compare that with the U.S., which barely made it back to 3.0% GDP growth in the second quarter for the first time in two years.
Investors are moving overseas: August fund flows showed a $14 billion net drawdown in U.S. equity funds and a $16 billion net increase in international equity funds, according to Morningstar data released this week. In its most recent weekly report, FactSet reported the more active universe of ETFs sucked in more money via overseas equity funds than in domestic equity funds. Given challenging valuations and uncertainty in the West, it’s no wonder investors are looking overseas.
Beijing is motivated to succeed: Sure, China lacks a true democracy or free-market system. But if you think that leaves top officials unaccountable if things go south, think again. This is particularly important in 2017, as the National Congress of the Communist Party of China convenes next month and President Xi Jinping is looking for another five-year term. Domestic stability and prosperity are crucial to those in power keeping it as well as preventing civil or economic disruptions that challenge their authority. We can moralize over the nature of a command-and-control government in China, but the bottom line is that the fortunes of those in power are closely tied to the fortunes of Chinese stocks and the local economy. As an investor, that’s a powerful backstop.
So what’s the trade?
If you are looking to move your money into China, there are a bunch of good options.
Megacap tech stocks in China have been a particularly good tactical bet in 2017, most notably Alibaba, as pointed out earlier. Given the growth of China’s digital economy, that will surely continue.
However, if you’re uncomfortable picking individual names but still want to play this hot sector, consider the lesser known KraneShares CSI China internet ETFKWEB, +0.98% Its digital flavor makes it focused on the biggest names in China including Alibaba, Tencent ( TCEHY, +0.12% 0700, +0.24% Baidu and JD.comJD, -1.51% With about $1 billion in assets since it was launched more than four years ago, it’s hardly an opportunistic fund that just launched out of someone’s garage.
For those looking to invest in a broader and less tactical way, the most popular vehicle is the iShares China Large-Cap ETF FXI, +0.37% (FXI) that holds well over $3 billion in assets. However, the fund has roughly a third of its cash stashed in just four positions and is a bit too top-heavy for my tastes.
Most of the biggest China ETFs are overweight just a few names like this, but not all. A more diversified way to play the region is the Deutsche X-trackers China A-Shares Fund ASHR, -0.17% Not only is this fund more diversified with only a single holding weighted at more than 5% currently, it is also a true China fund. As the name implies, ASHR focuses on “A Shares” — companies that trade on Chinese exchanges in Chinese currency — instead of “B Shares” that are mainly owned outside the region.
This fund’s direct investment in China pays off in a direct way when things are good; ASHR is up almost 25% year-to-date, neck and neck with the Hang Seng benchmark index and more than double the S&P 500.