Profit from China's Stimulus with this Infrastructure ETF - ETF News And Commentary
September 18 2012 - 5:34AM
Zacks
Seemingly, China’s economy is slumping as we head into the final
quarter of the year as the annual growth rate for the world’s
second largest economy is now around the 7.5%-8% level. While many
nations would kill for this kind of growth, it represents a
troubling trend for the one party state as it looks to transition
to a new leadership in short order.
After all, without exceptional economic growth, the average
Chinese might not be willing to tolerate the political repression,
forcing the Chinese Communist Party to keep growth rates elevated
in order to keep themselves safely in power. This could be an
especially big problem if a number of the country’s key export
markets, like the U.S. and Europe, remain weak, forcing export
growth levels far lower and hampering growth (see Forget FXI: Try
These Three China ETFs Instead).
While China could rely on consumers to help keep the economy
afloat, this doesn’t really seem to be an option at this time, as
imports are falling month-over-month suggesting that the Chinese
economy is still not ready to rebalance towards a more domestic
focus. In light of this, China looks poised to stimulate its
economy once again with a massive infrastructure boost.
In its latest iteration, China watchers expect the nation to
spend about one trillion yuan on subways, highways, airports, power
plants, and a host of other key infrastructure projects. In total,
the spending could reach as much as 2.1% of GDP, representing a
sizable boost to the Chinese economy.
Clearly, with Europe and American facing an uncertain future,
and with the Chinese consumer unwilling or unable to pick up the
slack, a greater level of investment in fixed assets in the country
is seen as the best course of action at this time (read Five
Emerging Market Infrastructure ETFs for the Coming Boom).
This boost in investment could help to at least temporarily add
to growth in China and possibly soften any hard landing in the
country. It has also, along with the general risk on atmosphere as
of late, helped to boost Chinese stock prices back up to more
respectable levels after their weak showing in much of the summer
period.
However, while most Chinese stocks have risen, investors could
see the greatest value by targeting a little known segment of the
China ETF world during this type of climate. This is because the
Chinese government is clearly betting on more infrastructure
spending at this time and is forgoing other avenues of growth. Due
to this, investors might want to consider taking a closer look at
the EG Shares INDXX China Infrastructure Index Fund
(CHXX).
This fund tracks the Indxx China Infrastructure Index which is a
benchmark of about 30 companies which are focused in on the
infrastructure segment of the Chinese economy. Exposure is tilted
towards industrials, but financials—and especially real estate—as
well as basic materials comprise double digit allocations as
well.
However, despite the product’s potential in this climate, CHXX
isn’t exactly the most popular with just over $10 million in AUM,
so bid ask spreads may be relatively wide. This could increase the
total trading costs for the fund and make the product more
expensive than the 85 basis point expense ratio (also see Gold
ETFs: Why Bid Ask Spreads Matter).
Still, if investors can get over low trading issues, the product
could be a great value as the trailing P/E is just 8.4 while the
P/B is just over 1.1. Meanwhile, the ETF is a solid choice from a
yield perspective as well, as the index is currently sporting a
3.1% payout, a level that is likely to soften the relatively high
expense ratio.
With this focus and the promise of more Chinese government
investment, this sector could hold up better than most in the China
ETF world. Given this, and the solid yield on CHXX, investors who
want some China exposure but are concerned about the overall market
may want to look to this fund as a relatively safe way to obtain
exposure to the People’s Republic in a sector that seems poised to
grow (see more in the Zacks ETF Center).
While it is true that China could abandon this approach or not
follow through with as much in investment, the stakes are just too
high for the nation as it changes its top leadership. Thanks
to this, CHXX, with its mid cap focus, could be a nice blend of
growth and value that could hold up better than most China ETFs no
matter what is happening in the broader global economy.
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EMERG-GS CHINA (CHXX): ETF Research Reports
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