Assessing The Market Damage In China: Spotting Some Bullish Factors

China stocks have been a brutal place to allocate capital over the last 15 years. A popular (or infamous) ETF that tracks the nation’s large-cap index is the iShares China Large-Cap ETF (NYSE:FXI). The fund has been dead money for more than a decade. Rallies capture the hope of the bulls, only to then be sold off in short order as a broad trendless range persists. 

FXI: A Lost Decade-And-A-Half/h2

Source: Investing.com

Earlier this year, there was some momentum building in FXI compared to the S&P 500. FXI’s relative performance was strong even as China’s harsh Covid lockdown measures were in full force during the second quarter. From late April through June, FXI beat SPY by about 30 percentage points. It appeared the embattled market was finally on the mend. Then mega-cap U.S. tech and consumer stocks staged a massive comeback as Chinese equities from those same sectors struggled. Another letdown for the China bulls.

One-Month Performance Heat Map: Big Red in China/h2

Source: Finviz

Dreadful One-Year Returns Among FXI’s Top Holdings/h2

Source: Morningstar

But is there value to be found in beaten-down China companies? I think it’s worth considering despite the awful price action during the latest bear market bounce for domestic stocks. Consider that, according to J.P. Morgan Asset Management, the China market features a historically low P/E multiple of just 10.9 using forward earnings estimates. It is an inexpensive number both compared to the 25-year range and versus other international markets. Bears will say that China stocks warrant a cheap earnings multiple given how much the nation’s authorities have a say in how its businesses operate. Just take a look at how the China government has strictly regulated parts of the tech, consumer, and education industries in the last 13 months.

A Compelling Valuation/h2

Source: JP Morgan Asset Management

As a technician, I also pay attention to broader supply and demand forces at play. Seasonality is what I consider to be a secondary indicator to absolute and relative price action. But it’s still something to monitor and weigh. I noticed that, on average over the past 17 years, FXI tends to rally from mid-late August through early November, according to Equity Clock. It would be a welcome relief for FXI considering that 2022 is off to the second-worst start to a year since its 2004 inception. 

Bullish FXI Seasonality Set to Kick In/h2

Source: Equity Clock

Finally, if you refer to the first chart, the $28 level has been pivotal support for the ETF over the last decade. Maybe we will see buyers slowly accumulate shares here once again.

The Bottom Line/h2

China’s stock market has endured a drubbing over the past year, underperforming the S&P 500 by about 20%. I think we could see a relief rally given some favorable long-term technicals and seasonal factors. Moreover, the nation’s stock market valuation looks cheap right now. As investors continue to dissect every day’s move in the S&P 500, do not overlook what’s happening in the world’s second-largest economy.

Disclaimer: Mike Zaccardi does not own any of the securities mentioned in this article.