As China celebrates the arrival of the Year of the Dog, we take a look at Chinese equity ETFs following a rocky start to the year for equity markets across the globe.
The Chinese stock market had a particularly strong run in 2017, with the MSCI China index rising 51% over the course of the year in US dollar terms.
However, China did not manage to avoid a hit during the recent sell-off in stock markets across the globe, with Hong Kong’s Hang Seng index dropping 5.1% in one day on Tuesday 6 February, while the Shanghai Composite closed 3.4% lower on the day.
Along with the pullback in the US markets, Chinese stocks were also affected by investors selling their holdings following a strong start to 2018, as they prepare for the long Lunar New Year holiday, which will also see China’s market closed for business from 15 to 21 February, while Hong Kong’s shares will not begin trading again until Tuesday 20 February.
As a result, between 8 and 13 February investors withdrew around €650 million from Chinese stock ETFs, according to TrackInsight data, though some positive flows resumed just before markets closed for the holiday. So far this year to 14 February, these products have taken in €1 billion in cumulated flows (as the chart below shows).
Can last year’s strong returns continue?
The recent sell-off has meant the return from the ETFs in this category has dropped to just 1.3% year-to-date, while investors who bought into the products a year ago would have made around 15% following the rout (a 10 percentage point drop from a high at the end of January, as can be seen from the graph).
Year-to-date (as of 15 February), the MSCI China index is up 6.3% in dollar terms, but so far this month it has seen a 5.5% drop, while other indices tracking the Chinese and Hong Kong markets have also suffered. Exchange-traded products that were affected by this include the iShares China Large-Cap, iShares MSCI China and the iShares MSCI Hong Kong, which fell 4.6%, 3.8% and 2.2% respectively on Wednesday 7 February.
Some investors believe there is reason to expect turbulent returns from the Chinese stock market throughout the Year of the Dog as investors could panic further as rates begin to rise across the world in response to higher prices and inflation pressures.
However, the fundamentals in China remain strong, with the economy growing faster than expected in 2017 at 6.9%, beating expectations of a 6.5% rise made at the beginning of the year, while strong consumer spending figures also point to a robust economy.
Will MSCI’s inclusion of A-shares be a game changer?
Meanwhile, this June will see index provider MSCI include 222 large-cap A-shares in its flagship Emerging Markets index, which could provide a boost to the local market and ETFs tracking A-shares.
A-shares are companies incorporated in China and listed on the domestic Shanghai and Shenzhen Stock Exchanges, as opposed to Hong Kong-listed shares.
The index provider announced last year that the inclusion will take place from June 2018 and this will mean an additional 0.73% exposure to China withing the Emerging Markets index on top of the existing 30% weighting, with the view to increase the A-share component further as time goes on.
Ahead of the launch, a number of Chinese asset managers are racing to offer index funds investing in the mainland stocks that are expected to join the MSCI EM index this year, according to Reuters, on expectations of a boost to these holdings.
According to the news provider, around two dozen MSCI index products are awaiting approval to launch in China, while products tracking A-shares across the globe are also seeing increased demand. With this in mind, the Year of the Dog may end up being another successful year for mainland Chinese stocks if this trend continues.