A Solid Start To 2017 For This China Play

Chinese stocks are among the best performers in the emerging markets space this year, which is benefiting an array of U.S.-listed exchange-traded funds. Conservative investors looking to participate in this trend can consider Hong Kong, which is not classified as a developing market, but is nonetheless levered to the China trade.

EWH On A Rip

Just look at the surging iShares MSCI Hong Kong ETF EWH, which is up 18-percent year to date. The $1.7 billion EWH, which tracks the MSCI Hong Kong Index and holds 46 stocks, is the largest Hong Kong ETF trading in the U.S. More importantly, economic data is supporting upside in Hong Kong equities.

“The economics ministry reported that gross domestic product rose 0.7 percent in the first three months of the year, taking the annual growth rate up to 4.3 percent, its fastest since the second quarter of 2011,” said Markit in a recent note. “This time last year, the pace of growth had waned to just 1.0 percent. The improvement in the economy had been flagged in advance by the Nikkei PMI, the latest reading of which also bodes well for strong growth to be sustained into the second quarter.”

EWH is one of the oldest single-country ETFs on the market having recently celebrated its 21st birthday. The ETF is heavily exposed to financial service stocks and related fare. For example, real estate is the ETF's largest sector weight at 26.8 percent with insurance providers, diversified financials and banks combining for over 31 percent of the ETF's weight.

ETF's Strength Bodes Well For 2017, China Economy

“The good start to the year adds to expectations that Hong Kong’s economy will grow in 2017 at a slightly faster rate than the 1.9 percent expansion seen in 2016. IHS Markit is expecting a 2.0 percent increase in GDP in 2017, but for growth to gradually slow to an annualized rate of 1.4 percent by the end of the year,” said Markit. “There are certainly signs of concern to be found in the April PMI survey. Although overall order books rose, orders from mainland China for Hong Kong products and services continued to wane, highlighting subdued demand from Hong Kong’s main export market.”

EWH's three-year standard deviation is about 400 basis points below that of the largest US-listed China ETF, underscoring the point that Hong Kong is a useful outlet for skittish investors seeking some China exposure.

Over the past three years, EWH has topped the largest China ETF by 450 basis points while being significantly less volatile.