That, in turn, could lead to renewed confidence in the yuan, a possible catalyst for global investors to focus on Chinese equities once again, simply because they are quite inexpensive.
Brendan Ahern, chief investment officer at KraneShares Advisors LLC, notes that the 12-month forward price-to-earnings ratio on the S&P 500 stands at 17, compared to just 11 for the Shanghai Composite Index. Despite the modest slowdown in export growth, Ahern says the economy is doing fairly well, especially in areas like tech and domestic consumption. He adds that China’s non-manufacturing (i.e. services) Purchasing Manager’s Index has recently expanded at an accelerating pace.
Ahern’s firm offers a pair of ETFs that benefit from those areas of economic strength. The KraneShares CSI China Internet ETF (KWEB), which carries a 0.72 percent expense ratio, has more than 40 percent of its assets invested in top-tier tech companies such as Tencent Holdings and Alibaba Group, while also bringing exposure to China’s smaller up-and-coming tech firms. It’s up 1.7 percent this year, making it one of the few China ETFs with a positive year-to-date return. (PGJ is also in that elite group, with a year-to-date return of 1.8 percent.)
Investors may also want to consider the KraneShares Zacks New China ETF (KFYP), which sports a 0.73 percent expense ratio and has also managed to stay in the positive column this year with a return of 0.8 percent. The fund brings exposure to sectors highlighted in China's Five-Year Plan such as technology, consumer staples, consumer discretionary and health care.
Still, for many investors, the trade spat between the U.S. and China remains an overarching concern. “It’s a hard issue to quantify because we don’t really know the position of either side,” Kalivas says. “China needs trade to be healthy, and we’ll have to let this run its course.”
That’s hardly reassuring in the short-term. But for longer-term investors, the recent sell-off in many Chinese ETFs and the lower valuations that has brought could be enticing. A cooling of trade rhetoric and/or the implementation of Chinese government stimulus measures could provide the catalyst for investors to rebuild their exposure to the world’s fastest-growing large economy. For now, though, focus on the targeted ETFs that are best-insulated from the current headwinds.