Cabot is unusual among investing advisories in that we actually take (and answer!) questions from our subscribers. We get lots of questions asking whether a stock has appreciated too far to still be buyable (usually a “no”) or whether a stock that has fallen off the end of the dock should be sold (usually a “yes”). But three or four times a year, I get a question from a subscriber who wants to know how to play a particular news story. And right now, a fast-rising China ETF comes to mind.
Investing in the News: China
Recently, when China was experiencing a bad year for flooding and earthquakes, someone wanted to know if this would be a good time to invest in Caterpillar (CAT), since the company’s heavy equipment would be in increased demand in the aftermath. And I’ve had questions about companies that might have been affected by interest-rate changes, natural disasters, elections and economic reports.
These questions aren’t silly. After all, there really was an identifiable shift in the fortunes of some sectors of the U.S. stock market after the election of Donald Trump. And that followed a smaller, but still significant, movement before the election among stocks that investors thought would be affected by the election of Hillary Clinton.
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Most recently, speculation has been rife about which Chinese stocks are most likely to be either boosted or undercut by the rise to unchallenged power of Xi Jinping.
Xi wasn’t exactly a shrinking violet over the first five years in office. His aggressive anti-corruption campaign was unusually rigorous, claiming a large number of high Communist Party officials. And perhaps his critics were being overly cynical in pointing out that his political rivals and opponents were far more likely to be suspected, convicted and ousted from the Party.
But Xi’s recent moves—having his name written into the Chinese constitution, failing to designate a successor for when his second five-year term ends and packing the Politburo with his supporters—are unprecedented in scale and thoroughness. He is seeking to ensure that he will be the unchallenged leader of China for the foreseeable future.
So is there a way to play the Xi Jinping ascendency? I think there may be.
China ETF to Buy
First, since China will have a consistent leader who is committed to preserving the power of the state, Xi’s rule will probably be a good thing for Chinese large-cap stocks, many of which are state-owned or state-supported.
And the lowest-risk way to gain exposure to China’s biggest companies is through a China ETF (exchange-traded fund). I would recommend iShares MSCI China ETF (MCHI), which tracks the performance of the top 85% of Chinese equities on a market capitalization basis. Here’s what a weekly chart of MCHI looks like, showing why China has been such a great place to invest since early 2016.
Some might prefer an ETF that tracks the 50 largest Chinese firms—like iShares China Large-Cap ETF (FXI)—but MCHI has pulled far ahead of FXI since the start of 2017. That’s largely because the state-owned companies in China can’t match the dynamism of its younger, more entrepreneurial businesses, which are found in MCHI.
There are other factors to watch out for in the Xi Jinping era, including a more assertive stance toward censorship of the Chinese internet. Most of the big Chinese internet companies—Baidu (BIDU), NetEase (NTES), Weibo (WB), Alibaba (BABA)—have been stung by government regulators at one time or another for failing to prevent objectionable content or opinions from appearing on their messaging services. (Or, in the case of Alibaba, for failing to prevent counterfeit merchandise from being sold on its retail platform.)
Still, for investors who are willing to pay close attention and monitor the health of their Chinese stocks, there are opportunities that put index investing options in the shade.
Here’s a weekly chart of China Lodging Group (HTHT), which has been in the portfolio of Cabot Emerging Markets Investor since March 2016. It has the kind of performance that can make a real difference to your portfolio’s total return. And with the weekly updates (and Special Hotlines if the action heats up), your exposure to Chinese event risk is lowered considerably.
If you have a taste for the returns that great emerging market stocks can bring to your portfolio (and the risk tolerance to weather the occasional storms), Cabot Emerging Markets Investor can be your perfect guide to how to play Xi Jinping’s China. Click here to join.