For investors in the world’s most important emerging market, the last few years haven't been so kind. There’s no denying that China hasn’t lived up to its portfolio potential recently. Slowing economic growth in the hot nation has prompted many investors to head for higher ground and abandon the developing country. As they fled, shares of Chinese companies have dwindled. The popular iShares China Large-Cap ETF (NYSE:FXI) is about 43% below its all-time high reached in 2008.
However, with a new year approaching, things may be turning around for Asia’s dominant economic force.
The “Year of the Horse” is quickly turning into a positive one of the Chinese economy as several key pieces of data are now moving up. For investors, the time to bet on a full-blown Chinese turn round could be at hand.
It seems that things are looking up for C in BRIC. After several years of disappointment, China may finally be on the brink of regaining its crown as the emerging market leader.
First, economic growth in the nation is finally stabilizing. After plunging- due to efforts to cool were too much- the nation has met with steady increases to GDP. Overall, China should hit its enviable full year target of 7.5% in GDP expansion. Driving that have been gains in China’s manufacturing and export sectors. Investment bank HSBC’s (NYSE:HBC) latest Chinese Flash Purchasing Managers Index showed a reading of 50.8- beating analyst’s expectations. That measure has been slowly increasing over the last few quarters and a measure above 50 indicates expansion in an economy.
However, the good times haven’t stopped with China’s industrial might. Its people are seeing positives as well. Aside from rising consumer spending, China’s leaders have announced new wide sweeping reforms that promise to change China for the better. These include an end to China’s one child policies as well proposals to help sure-up its banking system. That includes the establishment of an FDIC-like insurance system to protect consumer’s bank deposits. Additionally, Beijing said it would ease price controls for energy, water, telecom and other services.
Adding these facts to lower price inflation and a housing market that is finally “just right”, and you have a recipe for rising Chinese equities throughout the New Year. Especially if you consider how cheap China is right now.
The Shanghai Composite’s- the main index of Chinese stocks- can be had for only half of its price-to-book ratio reached in November 2010- its last record high. Meanwhile, its price-to-earnings 42% lower. That’s about a 44% discount versus the S&P 500.
Time to Bet On China
Given China's potential rebound and long-term promise, investors may want to give the nation a prime spot in their portfolio. The previously mention FXI is the most popular option, but it isn’t the only one. Its sister fund- the iShares MSCI China (NASDAQ:MCHI) –could be a better buy. The ETF offers a wider range of holdings- currently at 139. This includes top Chinese stocks such as PetroChina (NYSE:PTR), internet site Tencent and financial stock China Life Insurance (NYSE:LFC). That broad focus has led to higher returns over the last year as well. MCHI is up over 12%, while the FXI has only returned 9%. Investors looking for broad exposure can also use the SPDR S&P China (NYSE:GXC).
Another interesting option could be Chinese A-shares. Offering exposure to mainland Chinese stocks traded in local currency, these shares have been off-limits to foreign investors –until now. The brand new db X-trackers Harvest China ETF (NASDAQ:ASHR) provides direct access to the “real” Chinese stock market through direct ownership of A-shares. Competitor funds like the Market Vectors China ETF (NYSE:PEK) use swaps and counterparty agreements to achieve this goal. With the vast bulk of Chinese equities trading as A-shares, investors now have the opportunity to play all of China’s stocks.
Finally, with financial reforms on the way, China’s banking and bond markets could be big buys. The PowerShares Chinese Yuan Dim Sum Bond Portfolio (NYSE:DSUM) tracks Chinese Yuan-denominated bonds issued by Beijing and other government agencies, while the Global X China Financials ETF (NASDAQ:CHIX) best on bank shares. Both ETFs can used to add a little Chinese yield as well- with both yielding around 3%.
The Bottom Line
China hasn’t exactly lived up to its promise over the past few years. However, recent economic data is pointing in the right direction. For investors, now could be the best time to add the BRIC giant to a portfolio. The previous picks- along with the First Trust China AlphaDEX (NYSE:FCA) –make ideal selections to play the emerging market king.
Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.