Investors who still see strong growth potential in Chinese stocks have a new exchange-traded fund (ETF) to consider.
New York-based fund manager Neuberger Berman has converted its China-focused mutual fund into an ETF. On Monday, October 16, the Neuberger Berman China Equity ETF (“NBCE”) began trading on the New York Stock Exchange Arca.
Neuberger’s team takes a research-driven approach to allocating the fund, which invests predominantly in China-A Share equities, firms listed in Hong Kong, and American Depository Receipts (ADRs). Target companies will have strong balance sheets, exceptional earnings growth, and exhibit high potential for return on capital.
Neuberger claims its investment professionals “bring together deep market expertise, innovative data science capabilities, and strong corporate engagement tools to manage these investment solutions.”
Hazy Outlook
As 2023 opened, hopes were high among investors that the world’s second-largest economy would roar back to life. Yet, after a short burst of energy in January, China stalled and whimpered. Its much-awaited recovery has not materialized as it backslides deeper into economic malaise.
The MSCI China Index – which tracks around 85% of China’s public market – has stumbled over 10% year-to-date. Other indexes NBCE will be sensitive to, such as the Hang Seng, which reflects the Hong Kong stock exchange, has plummeted 13% this year.
Institutions are sounding the alarm. In Marrakech this month, the IMF and World Bank said China’s deepening property crisis is now one of the biggest risks to global growth. The world’s largest labor market is under stress. China’s urban youth unemployment in the country sky-rocketed above 20% in May. Meanwhile, international trade, which fuelled so much of China’s growth for decades, is slowing sharply. Outbound shipments from China contracted 12.4% year-on-year in June, while imports contracted 6.8% over the same period.
As the Federal Reserve strives to tame inflation and calm down a still-pumping US economy, Chinese authorities are desperate to excite their country out of its gloomy economic mood.
These opposite economic outcomes stem mainly from the very different routes Beijing and Washington took during the pandemic. Beijing refrained from the mass quantitive easing and stimulus packages that Washington indulged in, so while it has avoided the curse of not-so-transitory inflation, it instead has weakened demand and depleted consumer sentiment.
The economy slipped into a deflationary zone this year before consumer prices returned to positive territory in August, per data released by China’s statistics bureau. This could hint at a stabilizing scenario, although consumer demand remains weak.
The Economist Intelligence Unit (EIU) predicts China’s economy has “already bottomed out” and that core inflation will start to recover, albeit slowly, as overall price pressures generally remain muted. The EIU sees China achieving 5.2% real GDP growth for 2023 before trending consistently below 5% through the remainder of the 2020s.
Hence, while the outlook is not rosy, there is a possibility investors have become overpessimistic about China, leaving its stocks potentially oversold. The latest economic data from the country shows China’s economy grew by 4.9% year-on-year in the third quarter, beating market expectations.
NBCE currently trading around the $24 mark.