Is It Time to Buy China?
As investors, we are always looking for the next big opportunity to profit. And often, ideas that worked in the past but have gone out of favor are a great hunting ground for that next big opportunity. In recent weeks, we’ve seen one segment of the market start to show a nice mover higher after a big downturn in the last two years. That segment of the market is Chinese stocks.
So, now the question becomes, “Is it time to buy China?”
To help answer that question, today’s The Deep Woods features an excerpt from my daily publication, Eagle Eye Opener, which if you aren’t yet a subscriber, why not? This analysis comes to us from my “secret market insider,” a man who provides macro intelligence to some of Wall Street’s biggest firms, and who also has teamed up with me to give my readers a daily market brief with all the key information you need to understand the market that day — and every trading day.
And now, let’s find out if it’s time to buy China, courtesy of my secret source.
Over the past several years there have been few sectors/regions that have performed as poorly as Chinese stocks, as a series of policy decisions seen as hostile to private business in China combined with the Zero-Covid policy to hammer Chinese shares. The impact of these policies is clearly visible in the five-year performance gap between Chinese shares, represented via iShares China Large-Cap ETF (FXI), and the S&P 500, represented by the SPDR S&P 500 ETF (SPY), which is nearly 80% (-38.53% for FXI vs. 40.68% for SPY).
But over the past several weeks, China has taken a series of steps that address, and possibly reverse, these negative economic and business-related policies. And for the first time in years (perhaps since the start of the Trump administration) one can make the case that the outlook for Chinese growth is turning positive.
First, China has abandoned Zero Covid and the economy is returning to pre-pandemic normal. Zero Covid was a major economic headwind on the Chinese economy for the past several years, but the policy was effectively abandoned on Jan. 8, when China downgraded the severity of the disease and relaxed travel and quarantine rules. Now, in part because of a surge in Covid cases, the Chinese economy is not back to “normal.” Yet for the first time since March 2020, the case can be made it’s on the way.
Second, China appears to be relaxing its crusade against domestic tech companies. The poster child for Chinese authorities’ crackdown on Chinese tech companies was Didi Global, the Chinese ride sharing app. Some 18 months ago, Chinese authorities prevented downloads of Didi’s 25 various apps and forbade the company from taking on new registered users as punishment for Didi seeking a NYSE stock listing. That crackdown then led to Chinese authorities targeting other companies, but in many ways Didi was the one that started it all.
On Sunday, Chinese authorities announced that the Didi Global exile is over, as once again Chinese consumers can download the company’s apps and they are allowed to begin to register new users again, effectively allowing the company to start growing again. Time will tell if this signals a broader easing of the crackdown on Chinese tech firms, but it’s clearly a good start.
Third, the Chinese property market has been a weight around the neck of the Chinese economy for months, even since the collapse of Evergrande in late 2021. Since then, Chinese authorities have been conducting targeted/stealth bailouts or “takeunders” of various struggling Chinese property firms. China recently announced the creation of a $25-billion fund to recapitalize the property market. The fund will come from the PBOC and the China Industrial and Commercial Bank of China (China’s largest bank) and funnel into the economy via selected property managers. But make no mistake, this is a bailout of the property market and the capital should help to repair that market and contribute to better economic growth.
Fourth, and perhaps most importantly, China appears to be willing to try and re-engage the West. Earlier this week at the Davos World Economic Forum, Chinese Treasury Secretary Liu He stated that China was once again open for business and sought policies that would “strengthen international cooperation” and “world peace” and promote a return to globalization. It was later announced that He and Treasury Secretary Yellen would have a meeting today at Davos.
While broad, these moves reflect the most business and economically friendly policy changes in China in many years, and if they are followed through on, then Chinese growth should accelerate and that should translate to substantial gains in Chinese stocks.
Bottom line, while it’s only for the right risk-tolerant investor, for the first time in a long time the risk/reward for Chinese stocks is attractive, as long as these policy changes continue to progress. Chinese authorities appear committed to economic growth, if it’s like they were in the 2000s and early 2010s, then the return potential for Chinese stocks is significant.
From an exposure standpoint, FXI remains the “easiest” way to get exposure to Chinese stocks, while KWEB remains our preference for high-growth Chinese Internet names (although we stress that is a very volatile ETF and is not for the faint of heart).
As you can see, the analysis in my Eagle Eye Opener is far from the average take on markets you get anywhere else. Moreover, it’s this kind of market analysis that we provide you every day, straight to your inbox, by 8 a.m. ET — but only if you’re a subscriber to the Eagle Eye Opener.
ETF Talk: Take a Global View with This ETF
The iShares Global Comm Services ETF (IXP) is an investment vehicle that holds a range of global companies in media, social media, entertainment, search, video gaming and telecommunications industries.
The exchange-traded fund’s (ETF) holdings include companies at a variety of market-cap levels, though larger companies tend to be the targets of the lion’s share of its assets. Each of these industries is a mover and shaker, with some routinely seeing new developments on the leading edge of the cultural milieu.
IXP has struggled in the past 12 months, which may present interested investors with an appealing entry opportunity. In that period, the fund is down 28.23%, noticeably worse returns than those offered by the broader market. That means these are beaten-down stocks and sectors that could post strong gains if they were to return to their year-ago levels.
IXP’s 2023 performance has been nicely positive, causing it to nearly reach its 200-day moving average (MA), as the chart below shows. IXP last touched its 200-day MA in late 2021.
Before then, the ETF was performing impressively, nearly doubling between April 2020 and September 2021. A return to that form would be accretive for investors.
Chart courtesy of www.StockCharts.com
The expense ratio of this fund currently sits at 0.40%. Its current dividend yield is 1.43%. The ETF’s net assets total $209.9 million, which makes the fund relatively small, but still popular enough to consider investing in it.
Plus, 63.43% of the fund’s assets are in U.S.-based companies. The remainder offer global exposure primarily to China and Japan, along with a smattering of others. Top holdings of IXP include Alphabet Inc. (GOOGL/GOOG), with its two different share classes combining for 20.14%; Meta Platforms Inc. (META), 9.05%; Tencent Holdings Ltd., 8.58%; The Walt Disney Company (DIS), 5.42%; and Comcast Corp. (CMCSA), 4.72%. It is important to note that with shares of Google making up 20% of assets, the performance of that company has a large impact on this fund’s price.
Investors curious about global companies involved in media, social media, entertainment, search, video gaming and telecommunications industries may wish to consider iShares Global Comm Services ETF (IXP) as a potential portfolio enhancer.
As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.
In case you missed it…
For the Love of Conversation
Okay, I’ll admit it: I am in love.
No, I am not speaking here of romantic love, as that’s a topic for another forum. Today, the love I want to talk about is the love I have for conversation, my love of exchanging ideas and my love of persuading someone that what I think to be correct is a point of view that they might also want to consider.
First off, notice how I said that I am love with conversation, and not with argument. Yes, from a formal education perspective, I’ve been trained to analyze complex arguments. I spent my undergraduate years at UCLA honing this skill while earning my B.A. in Philosophy. But argument in the adversarial, confrontational sense is not what I love.
What I love is a conversation where both parties can exchange even diametrically opposed views and still come out of the experience with a richer understanding of the opposing side, and perhaps a greater understanding of the strengths and flaws of their own side. And while this can be difficult at times, it also can be a profoundly rewarding experience.
Yet as my father often told me, when you engage in any difficult pursuit in life, you want to “make sure the juice is worth the squeeze.” That was his way of saying that if you engage in any pursuit or any exchange, you should first consider whether it’s worth your time and effort.
Unfortunately, in our ultra-polarized political and social milieu, it has become increasingly difficult to come to the conclusion that the juice is worth the squeeze. That’s not only true of opposing sides in an issue, but often from people who are mostly of similar opinion on many topics.
I’ll relate two personal experiences here to give you an idea of when the juice is not worth the squeeze, and when it is worth it.
I attended a gathering of libertarian/free-market types last year. This event had two very prominent speakers who conducted an excellent Q&A session after interesting presentations. One of the questions, was, however, incredibly disturbing.
A woman had asked a question about the pandemic and the lockdowns, a question which contained in it a very negative assessment of Dr. Anthony Fauci, and how he has handled the public communication on COVID-19. Then she ended her question by asking the speakers the following: “So, who is worse, Dr. Fauci or Dr. Mengele?”
The room sort of gasped, and rightly so. And to their credit, the speakers pivoted, basically brushing the comment aside as that of a disturbed person who equated one of the world’s leading experts on immunology and infectious diseases with one of the most despicable characters in human history, a Nazi doctor who performed heinous medical experiments at the Auschwitz death camps.
Later that evening, I was engaged in a great conversation with several people, and this same woman rudely interrupted our conversation to start talking about her agenda. I couldn’t help but address her with my assessment of her sickening question, asking her if she really believed that Dr. Fauci and Dr. Mengele were in any way equivalent. Her answer (prepare to be stunned): “Dr. Fauci is worse, at least Dr. Mengele didn’t kill anyone.”
I immediately knew that conversing with this woman was an example of the juice not being worth the squeeze, because what do you say to someone who is this ignorant and this confused? Does she not know that Dr. Mengele was called the “Angel of Death?” A person such as this is not subject to rational discourse, and she proved it with basically every word she uttered. My advice is to not waste your time with these sorts. The juice ain’t worth the squeeze.
On the opposite, and much more hopeful, end of the spectrum was an interaction I recently had with a neighbor of mine. This man was a self-proclaimed political progressive who is proudly in the Bernie Sanders wing of the Democratic Party.
He and I were talking politics during a weekend barbecue at a nearby ranch, and I told him that while I disagreed with Sen. Sanders on policy, I understood why his views had such strong appeal. In fact, I even referred my neighbor to my Feb. 20, 2020, article on the subject.
I explained that the reason why I thought Sanders is so appealing to so many is because he doesn’t just talk about policy, he talks about policy in moral terms. Policy isn’t just about what works or what maximizes the social welfare. Policy, according to Sanders, is about what’s morally right and wrong.
This Sanders supporter admitted that he never thought of it that way, and that he agreed with me upon reflection. From there, I was able to talk about this issue in moral terms, explaining to him that I thought it was immoral for government to punish the highest achievers in our society and to redistribute their achievement to others by force (i.e., taxation).
My moral assessment of that premise is that it is theft, and prohibition against theft is a moral principle that every society in history has abided by. I further explained that what I would like to see is a politician arguing in favor of capitalism — not just on utilitarian grounds, but also on moral grounds.
Those grounds are that capitalism is the only economic system that supports individual rights, property rights and freedom from force and coercion, either by other individuals or by a collection of individuals known as government.
The result of this exchange was that my neighbor learned more about his own position, and why he held it. Moreover, he learned much more about my position, and why I held it. And not just in some tribal, red state vs. blue state paradigm. Rather, I was talking to this man about moral principles, and how they operate in politics.
We both came away from our discussion gratified, and in this case, the juice was definitely worth the squeeze.
So, whenever you’re interacting with others, or whenever you choose to take on a difficult task (or really whatever you choose to do in life), I recommend determining whether the juice is worth the squeeze.
If it’s not, then find a squeeze that is worthy of your life. And most importantly, surround yourself with those who also have a love of conversation, and who can engage in the rational quest for enlightenment.
Confucius Say Be Noble
“The noble-minded are calm and steady. Little people are forever fussing and fretting.”
If you want to be “noble-minded” (and who doesn’t?) then one way to do so is to remain calm and steady in your approach to life. Doing so will help you avoid getting caught up in the pettiness, fussing and fretting that everyday existence tempts us into. So, as Confucius says, be noble.
Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.
In the name of the best within us,