These China ETFs Look Undervalued

With the MSCI China Index lower by 9.56 percent this month and residing 18.5 percent below its 52-week high, some aggressive traders and investors may be thinking Chinese equities are starting to look like value propositions.

Some analysts in the exchange-traded funds space don't disagree with at least one ETF analyst seeing value in some tactical, niche China funds that often go overlooked.

What Happened

“Traders are right to worry about the fallout from a trade war between the U.S. and China,” said analyst Michael Krause of the ETF Research Center in a Tuesday note. The damage to corporate profits—whether severe or barely noticeable—is unknowable. This uncertainty is being reflected in stock prices. It's also likely there are bargains among the wreckage, and investors might be able to pick up solid companies at a discount.

The Global X MSCI China Industrials ETF (CHII), which is down more than 11 percent this month, is one of the China ETFs that could be a credible value idea.

“The potential upside here comes from valuations, which appear to be pricing in a severe downturn,” said Krause. “Specifically, these stocks have a P/E ratio of just 7.9x forward earnings estimates, cheaper than at any other point in the past 5 years. They also trade at a roughly 10% discount to book value. Finally, dividends appear safe with a payout ratio (dividends per share divided by EPS) of just 27%.”

CHII, which has just $2 million in assets under management, but it yields 2.35 percent and China is one of the steadier dividend growth markets among emerging economies.

Why It's Important

The KraneShares MSCI China Environment ETF (KGRN), an ETF play on China's efforts to reduce its massive pollution footprint, is in a bear market, residing 25.32 percent below its 52-week high. There could be valued to be had with this thematic fund.

“We think that the 'green' focus of companies in this fund may offer some respite from trade wars since much of their fortunes are tied to the secular growth of environmentally focused spending, including Chinese domestic infrastructure,” said Krause. “And these firms are growing much faster than Chinese companies as a whole.”

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