Rethinking China ETFs For 2019

Chinese stocks are tumbling this year and no corner of equity markets in the world's second-largest economy are proving safe. The MSCI China A Index, which tracks stocks trading on mainland China, has lost more than a quarter of its value this year.

Trade tensions between the U.S. and China are likely to remain a front burner issue in 2019, impacting scores of China exchange traded funds along the way.

What Happened

The KraneShares Bosera MSCI China A Share ETF KBA is likely to be among the China ETFs in the spotlight next year, particularly because KBA is one of the marquee U.S.-listed funds tracking mainland Chinese stocks, also known as A-shares.

“We believe the US and China are working toward a compromise on trade as the negative effects of the tariffs take hold,” said KraneShares in a recent note. “China’s recent third-quarter economic statistics put year-over-year GDP growth at 6.5%, slightly missing analyst expectations of 6.6%³, and the US stock market has erased all of its 2018 gains, having fallen about 15% since hitting its peak in September.”

Why It's Important

The $304 million KBA, which turns five years old in March, holds 240 stocks, all of which are large- and mid-cap names. A noticeable result of Chinese stocks tumbling this year are depressed valuations. At the end of the third quarter, KBA's price-to-earnings ratio was just 11.68x, putting it well below U.S. stocks and some international benchmarks.

KBA allocates 36.80 percent of its weight to financial services stocks and another 10.8 percent to consumer discretionary names, two sectors that, in China, are sliding this year.

“The effect of trade tensions on the performance of Chinese equities has been significant this year, and US equities have also started to feel the impact,” said KraneShares. “Moreover, there are other factors on the horizon that could create skepticism about the continued rise of the US bull market. The Federal Reserve has hiked interest rates four times this year, increasing the federal funds rate to 2.25- 2.50% with two more rate hikes expected in 2019.”

What's Next

Some of the allure of Chinese stocks and KBA are the aforementioned compelling valuations. By several metrics, Chinese equities are downright cheap relative to U.S. equivalents.

KBA's underlying index has a forward price-to-earnings ratio of less than 9, a forward price-to-book ratio of just over 1 and a forward price-to-earnings-growth ratio of just 0.79, according to KraneShares data.

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