China ETFs: Mark Mobius sees reasons to be optimistic on China

Feb 12th, 2012 | By | Category: Equities

The Year of the Dragon has given rise to great excitement across China and Chinese communities worldwide. To the Chinese, Dragon years are associated with great deeds, innovative ideas and big projects.

China ETFs: Mark Mobius gives his outlook on China’s economy and sees reasons to be optimistic

"It is very possible that the renminbi could become a global reserve currency by 2020," says legendary emerging markets investor, Dr Mark Mobius.

However, outside China, some commentators have been a little less sanguine about the country’s prospects, pointing to reduced GDP figures and poor stock market performance last year. While acknowledging these concerns, Dr Mark Mobius, executive chairman of the Templeton Emerging Markets Group, sees reasons to be optimistic:

“Some commentators have been quick to write off China after a sluggish year for Chinese equities. The high-growth economies of China and other emerging Asian and Latin American countries lost some momentum as 2011 wore on, but to me they now appear poised for softer landings than their developed-market counterparts,” he said.

Macroeconomic picture

“From a mid- to long-term perspective, the global economic situation continues to look very good for a number of reasons. First of all, many emerging markets are growing at a rapid pace and we don’t expect growth to slow down too much over the next decade, although the percentage changes can naturally decelerate when the GDP numbers get bigger. Secondly, we believe the situation in Europe can be worked out and there will likely be considerable reform in European countries such as cuts in government spending and measures taken to stimulate business by lowering taxes and reducing bureaucratic burdens,” he said

FEATURED PRODUCTS

Credit Suisse CSI 300 Index ETF (CCSI)

– Diversified exposure to 300 companies traded
on the Shanghai and Shenzhen stock exchanges

– Collateralised swap-based replication with
full transparency to collateral holdings

– UCITS III compliant, LSE-listed, UK Reporting
Status, eligible for ISAs and SIPPs

– TER of just 0.50%, considerably less
than actively managed China funds

ETFS Long CNY Short USD ETC (LCNP)

– Tracks the MSFX Long Chinese Renminbi Index,
providing long exposure to the renminbi vs dollar

– The renminbi is accessed through the use of
non-deliverable forward contracts fully
collateralised within a ring-fenced SPV

– UCITS III compliant, LSE-listed, eligible for
ISAs and SIPPs. Traded in GBP

– Low TER of 0.59% for what is a restricted
currency

Commodities, consumers, currency
Further he added: “The world’s most populous country remains one of the fastest-growing major economies. With a population base of 1.3 billion people, consumerism has flourished in China. Rising per capita income and a strong demand for consumer goods and services mean the earnings growth outlook for stocks linked to this theme is positive.

“Foreign direct investment also continues to grow as international investors remain attracted to China’s booming economy China’s foreign reserves are also the largest in the world, making it less vulnerable to external financial shocks. During the last quarter, inflationary pressures eased further in China and the industrial sector again recorded strong growth.”

“Commodity stocks look good because we expect the global demand for commodities to continue its long-term growth. Taking a long-term view, we expected commodity prices to trend upward due to continued demand and supply constraints. Commodities can also offer another way to access the high growth trajectory of nations like China and take advantage of greater demand. China will boost domestic consumption to offset an export slowdown and allow for faster gains in the renminbi to tame inflation. We also see consumer stocks benefitting from rising incomes”, Dr Mobius said.

In January 2011, China began allowing its domestic companies to use the renminbi for overseas investments. According to Dr Mobius, that was regarded as the next step in a series of measures that China has put in place over the past few years to internationalise the renminbi.

“Despite global reservations stemming from China’s status as a developing country and its cautious approach to monetary policy, it is very possible that the renminbi could become a global reserve currency by 2020. If that occurs, it would further cement China’s prominence on the global economic stage. The renminbi might potentially replace the role of the Japanese yen, given that its usage was driven by Japan’s former economic dominance. Over the longer term, it will be interesting to see how China evolves and balances its communist regime with its capitalist economy, but thus far the government has at least shown itself as dynamic in the face of economic challenges,” he said.

Dr Mobius concluded: “In the year of the Dragon, China might catch some sniffles, and the side effects are likely to be felt by countries that have depended on the dragon’s appetite for commodities such as iron ore and coal. There could be a lot of market volatility globally in 2012, but we think the dragon is unlikely to be distracted from its long-term race.”

For UK-based investors wishing to gain exposure to China’s equities and currency, there are a number of ETPs to choose from, tracking a range of different Chinese indices.

iShares FTSE China 25 ETF

DB X-tracker FTSE China 25 ETF

EasyETF FTSE China 25

The FTSE China 25 Index measures the exposure to the 25 largest and most liquid Chinese stocks (Red Chips and H shares) listed and trading on the Hong Kong stock exchange.

Source MSCI China ETF

HSBC MSCI China ETF

DB X-tracker MSCI China Index ETF

The MSCI China Index measures the performance of the top 85% of equities by market capitalisation in the Chinese equity markets.

Lyxor ETF China Enterprise

The Hang Seng China Enterprises Index (HSCEI) consists of companies registered in the People’s Republic of China and listing on the Hong Kong Stock Exchange.

PowerShares FTSE RAFI Hong Kong China ETF

The FTSE RAFI Hong Kong China Index is designed to track the performance of the largest Hong Kong companies on the FTSE RAFI Hong Kong China Index based on the following four fundamental measures of firm size: book value, income, sales and dividends.

Credit Suisse CSI 300 ETF

DB X-tracker CSI 300 Index ETF

The CSI 300 Index measures the performance of 300 stocks traded on the Shanghai and Shenzhen stock exchanges.

ETFS Long CNY Short USD (£) ETC

ETFS Long CNY Short USD (LCNY) is designed to track the MSFX Long Chinese Renminbi Index (TR), which aims to reflect movements in the price of Non Deliverable Forward (NDF) contracts on the renminbi currency versus the US dollar.

Credit Suisse MSCI EM Asia ETF

Amundi ETF MSCI EM Asia

SPDR MSCI EM Asia ETF

The MSCI EM Asia Index measures the equity market performance of approximately 8 emerging markets in Asia. As of 30/11/2011 China had a weighting of 29.22% (Taiwan accounted for an additional 18.21%).

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