FXI: Making The Bullish Case For China
Summary
- China, the world's second-largest economy, has, for lack of a better way of saying it, been a terrible place to invest in.
- With inflation falling off a cliff, I suspect the PBoC will take actions to try to spur consumer spending.
- Investing in China with iShares China Large-Cap ETF comes with its unique set of geopolitical risks, particularly with the country's growing influence on the global stage.
- Looking for a helping hand in the market? Members of The Lead-Lag Report get exclusive ideas and guidance to navigate any climate. Learn More »
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China, the world's second-largest economy, has, for lack of a better way of saying it, been a terrible place to invest in. When looking at the iShares China Large-Cap ETF (NYSEARCA:FXI), it's worse than a lost decade. The exchange-traded fund ("ETF") is trading back to levels not seen since March 2009. We all know there are legitimate concerns around the government and regulation, but is there a bullish case to consider finally buying FXI?
TradingView.com
Overview of FXI
The FXI ETF tracks the FTSE China 50 Index, composed of the 50 largest and most liquid Chinese stocks listed on the Hong Kong Stock Exchange. This ETF is a reasonable choice for investors who wish to gain exposure to China's growth without the need to invest in individual Chinese stocks.
Despite all of the arguments for a surge in economic activity post re-opening, China's economy and markets have performed completely opposite of what Wall Street was expecting. Inflation? What inflation?
YCharts
China Easing Incoming?
With inflation falling off a cliff, I suspect the PBoC will take actions to try to spur consumer spending. If that happens, this would be particularly relevant for FXI as the fund's largest sector allocation is to Consumer Discretionary stocks. The recent uptick in retail sales figures provides a positive outlook for this sector, which in turn is expected to support FXI's performance.
iShares.com
Geopolitical Risks and Opportunities
Investing in China comes with its unique set of geopolitical risks, particularly with the country's growing influence on the global stage. Recent partnerships between China and Russia, tensions with Taiwan, and issues surrounding technology and intellectual property rights are a few examples. However, these risks could also present investment opportunities, especially for contrarian investors who believe that these challenges are already factored into the current share prices.
The improving state of the Chinese consumer, in terms of spending, is vital for the performance of FXI. Recent retail sales figures out of China show an expansion of year-over-year percentage gains across the retail sector, which should help support FXI in the coming months. But growth is still anemic, which is the exact opportunity for investors.
TradingEconomics.com
Risks and Rewards
While there are several compelling reasons to invest in FXI, it's essential to take into account the heightened risks associated with it. The geopolitical tensions and the varying paths the U.S. and China are taking with respect to the Russia-Ukraine conflict add to this risk. However, given the ETF's current valuation and China's economic resilience, some investors may find the potential rewards worth the risks.
Conclusion
Despite recent deflationary trends observed in the Chinese economy, investors should not overlook the growth potential that the country still holds and resolve of the PBoC. With the right fiscal and monetary measures, China can steer its economy towards a path of sustained growth, making investments in funds like iShares China Large-Cap ETF more rewarding in the long run.
While the geopolitical risks cannot be ignored, they should be seen in the context of the broader economic trends that underline China's undiminished role as a global economic powerhouse. Investors need to be mindful of the risks associated with investing in China, but with a careful and balanced approach, the potential rewards can be significant.
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This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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