Is It Time to Take a Look at Chinese Stocks?

The major U.S. indexes notched another trio of record closing highs today.

Year-to-date, the Dow Industrials are now up 5%, the S&P 500 Total Return Index is up 6% and the Nasdaq Composite is up 8.9%.

That’s not bad … but it’s nothing compared to what Chinese stocks have done.

Since the beginning of this year, the iShares FTSE/Xinhua China 25 Index ETF (FXI) is up 11.8%.

That Exchange-Traded Fund is pegged to the index of the same name. But basically it holds the biggest, and arguably the best, publicly traded Chinese companies.

Now, besides the recent outperformance, there are several other reasons why investors might want to look at buying Chinese stocks again.

A recent note to clients from Morgan Stanley (MS) outlined the bullish case for Chinese stocks. This investment giant cited two main planks of optimism: a return to earnings growth, and an asset class rotation away from bonds and property and back to stocks.

So, how much upside does Morgan see for Chinese stocks?

Well, how about more than 40% from end-of-year levels!

Here’s the excerpt from the Morgan note, as reported in Barron’s:

Our target price for the Shanghai Composite remains 4,400 (+42% vs. current levels) with earnings per share of 200 for 2017 (up over 10% from last reported trailing integer and a forecast 6% yoy growth) and target P/E of 22x (currently 17.6x and a 5-year range of 9.5x to 25.0x) with a re-rating driven by asset class rotation away from property and to a lesser extent bonds.

That’s a very bullish outlook on China.

But as we’ve already seen in just a month and a half of 2017 trade, China’s stock gains are on pace to easily surpass that 40%-plus Morgan end-of-year price target.

According to an article on Nasdaq.com about the recent gains in Chinese stocks:

The global forecast for the Asian markets is upbeat thanks to easing geopolitical concerns and a bump in the price of crude oil.

What are those “easing geopolitical concerns”?

Well, so far, President Trump has largely abandoned his tough-on-China campaign rhetoric. The president also has adopted the so-called “one China” policy.

Mr. Trump did so last week on during a Thursday night phone call with Chinese President Xi Jinping. This was widely viewed as an effort to ease diplomatic tensions between the two powers.

That same Morgan Stanley note also cited the growth of China’s IPO market as another reason for more buying in Chinese equities this year.

Per Barron’s:

China regulators recently accelerated the IPO review and approval process three times last year, with the biggest move in November and the analysts note the government has “effectively doubled the number of IPO approvals each month.”

The article went on to cite Morgan Stanley’s note, which referenced data from a Deloitte study on Chinese IPO growth:

“There had been in total 248 IPO issuances in 2016 in the China A share market. Over 70% of them (180) were accomplished in 2H 2016, which shows a trend of acceleration over the course of last year. We also believe that the total IPO fund raising size will grow significantly in 2017. …

“Deloitte forecasts that 380-420 IPO issuances will be completed in China’s A share market in 2017, with fund raising size of RMB250-280 billion (US$36-40 billion). These numbers imply a 60%-80% growth vs. 2016 in terms of both number of IPOs and fund raising scale.”

That’s a big growth driver for China A shares. But how do you get directly invested in this space?

The answer is via ETFs, and in particular the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR).

This fund tracks an index of the 300 largest Chinese shares traded on the Shanghai and Shenzhen exchanges.

Year-to-date, ASHR is up 8.4%, so it’s tracking closely with the Nasdaq Composite.

Given the aforementioned positives that are fueling Chinese stocks, investors should definitely take a closer look at this segment.

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If you would like to comment on this issue, or any of the issues we cover in the Afternoon Edition, all you have to do is leave me a comment on our website or send me an e-mail.

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Stocks opened at record highs after the long holiday weekend thanks to rising oil prices, a healthy round of retail earnings and some merger mania to start the short week.

• The Dow rose 0.6%, boosted largely by Wal-Mart’s (WMT) 3% gain. This was thanks to rising same-store sales over the past quarter, in-line guidance for the first quarter and a dividend boost to $2.04 per share.

• Home Depot’s (HD) announced $15 million share-buyback plan boosted its stock 1.4% while Macy’s (M) stayed flat on word that last quarter’s profits were better than expected.

• Citi raised its price target for crude oil $70 by year-end, which helped oil to gain 1% today. So did optimism about OPEC’s growing compliance with its own production-cut targets that are designed to help ease the global oil glut.

• Popeye’s Louisiana Kitchen (PKLI) shares zoomed 19% higher, to $78.73 per share. This after news that Restaurant Brands International (QSR) wants to buy the chain for $1.8 billion, or $79 per share. Usually the acquiring company sees its shares fall on such an announcement, but QSR shares gained 6.8% in Tuesday’s session.

• Bloomin’ Brands (BLMN) said it will close 40 Outback Steakhouse, Carrabba’s and Bonefish Grill restaurants throughout the U.S. by year-end. This after posting a net loss of $4.3 million last quarter vs. a $17.7 million profit in the year-ago quarter.

• UK bank HSBC Inc. (HSBC) reported a 62% drop in its 2016 pre-tax profit, which sent shares down 5.3% today. The world’s sixth-largest bank by assets is also under investigation for potential money-laundering offenses.

• 16 CEOs called upon Congress to overhaul the tax code. Manufacturers like General Electric (GE), Boeing (BA) and Raytheon (RTN) wrote that the proposed Border-Adjustment Tax would make their goods more competitive abroad.

Good luck and happy investing,

Brad Hoppmann
Publisher
Uncommon Wisdom Daily

Your thoughts on “Is It Time to Take a Look at Chinese Stocks?”

  1. Hi Brad,
    Oh great, so now everything is looking “rosy” for China! Have to hand it to the banking elite, which loves China for it’s great mix of Crony Capitalism and Communism. Bottom line is that China’s Stock and Real Estate bubble WILL BURST and I believe we are in the final stages of a topping of the overall capital markets….

  2. Hello Brad,
    I am sure that The Government of China is quite happy to have all these U.S. Banks are underwrite corporate bonds in China because the U.S. taxpayers will be on the hook as they always are for all foreign losses by U.S. banks.

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