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Assessing The Market Damage In China: Spotting Some Bullish Factors
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IntroductionChinese equities sharply outperformed U.S. markets in May and June but not JulyAfter awful one-year ...
- Chinese equities sharply outperformed U.S. markets in May and What are the international foreign exchange trading platformsJune but not July
- After awful one-year returns, China market could be a buy
- FXI’s bullish seasonal trend is something to consider ahead of H2 2022
China stocks have been a brutal place to allocate capital over the last 15 years. A popular (or infamous) ETF that tracks the nation’s large-cap index is the iShares China Large-Cap ETF (NYSE:FXI). The fund has been dead money for more than a decade. Rallies capture the hope of the bulls, only to then be sold off in short order as a broad trendless range persists.
FXI: A Lost Decade-And-A-Half
FXI Daily
Source: Fxgecko.com
Earlier this year, there was some momentum building in FXI compared to the S&P 500. FXI’s relative performance was strong even as China’s harsh Covid lockdown measures were in full force during the second quarter. From late April through June, FXI beat SPY by about 30 percentage points. It appeared the embattled market was finally on the mend. Then mega-cap U.S. tech and consumer stocks staged a massive comeback as Chinese equities from those same sectors struggled. Another letdown for the China bulls.
One-Month Performance Heat Map: Big Red in China
Performance Heat Map
Source: Finviz
Dreadful One-Year Returns Among FXI’s Top Holdings
FXI Top Holdings
Source: Morningstar
But is there value to be found in beaten-down China companies? I think it’s worth considering despite the awful price action during the latest bear market bounce for domestic stocks. Consider that, according to J.P. Morgan Asset Management, the China market features a historically low P/E multiple of just 10.9 using forward earnings estimates. It is an inexpensive number both compared to the 25-year range and versus other international markets. Bears will say that China stocks warrant a cheap earnings multiple given how much the nation’s authorities have a say in how its businesses operate. Just take a look at how the China government has strictly regulated parts of the tech, consumer, and education industries in the last 13 months.
A Compelling Valuation
Global Earnings Growth
Source: JP Morgan Asset Management
As a technician, I also pay attention to broader supply and demand forces at play. Seasonality is what I consider to be a secondary indicator to absolute and relative price action. But it’s still something to monitor and weigh. I noticed that, on average over the past 17 years, FXI tends to rally from mid-late August through early November, according to Equity Clock. It would be a welcome relief for FXI considering that 2022 is off to the second-worst start to a year since its 2004 inception.
Bullish FXI Seasonality Set to Kick In
FXI Seasonality
Source: Equity Clock
Finally, if you refer to the first chart, the $28 level has been pivotal support for the ETF over the last decade. Maybe we will see buyers slowly accumulate shares here once again.
The Bottom Line
China’s stock market has endured a drubbing over the past year, underperforming the S&P 500 by about 20%. I think we could see a relief rally given some favorable long-term technicals and seasonal factors. Moreover, the nation’s stock market valuation looks cheap right now. As investors continue to dissect every day’s move in the S&P 500, do not overlook what’s happening in the world’s second-largest economy.
Disclaimer:Mike Zaccardi does not own any of the securities mentioned in this article.
Statement: The content of this article does not represent the views of FTI website. The content is for reference only and does not constitute investment suggestions. Investment is risky, so you should be careful in your choice! If it involves content, copyright and other issues, please contact us and we will make adjustments at the first time!Tags:
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