In a May 2023 Barchart article, I concluded:
While Chinese stocks offer value on paper, and the Chinese economy could be eclipsing the U.S. over the coming years, the geopolitical tensions between Washington and Beijing remain a clear and present danger that could lead to trade barriers and even delistings of many of China’s leading companies trading on the U.S. and other foreign exchanges.
The trend in Chinese stocks was lower in May 2023, while the leading U.S. stock market indices were in bullish trends. Over the past fourteen months, the price action has been a testament to the old saying that the trend is always your best friend.
The FXI holds the leading Chinese large-cap stocks
The iShares China Large-Cap ETF product’s (FXI) fund summary states:
At just over $25.50 per share, FXI had nearly $4.24 billion in assets under management. FXI trades an average of over 31.25 million shares daily and charges a 0.74% management fee. Its top holdings include:
The top holding with an over 9% allocation is Alibaba Group (BABA), China’s answer to Amazon (AMZN).
The FXI remains in a bearish trend
Before the 2008 global financial crisis, FXI reached a record $73.19 high in October 2007. After plunging to a 2008 $19.35 low, FXI traded in a $28.10 to $54.52 range from April 2009 through February 2022.
The chart shows FXI broke through the bottom end of the trading range in March 2022 and has made lower highs and lower lows since the February 2021 $54.52 high.
Markets reflect the geopolitical and economic landscapes, which have been negative for Chinese investments. The bifurcation of the world’s nuclear powers since the February 2022 “no-limits” agreement between China and Russia eroded investor confidence. Moreover, economic weakness in China has only exacerbated the decline in Chinese stocks.
New highs in the QQQ, DIA, and SPY
While Chinese large-cap stocks continue to decline, the ETFs reflecting the price action in the U.S. tech-heavy NASDAQ, the Dow Jones Industrial Average, and the leading diversified S&P 500 index have soared.
The chart of the QQQ ETF reflects the price action in the NASDAQ 100 composite. It shows the bullish price action over the past years that pushed QQQ to a new record high in July 2024.
The DJIA average ETF, DIA, has made higher lows and higher highs, leading to a record peak in July 2024.
The SPY ETF, reflecting the price action in the S&P 500 index, has reached another record high in early Q3 2024.
The bottom line is that the FXI has not followed the leading U.S. stock market indices. The price-to-earnings ratio of the leading U.S. stock market indices remains far higher than that of the large cap Chinese stocks.
A contrarian position is a legendary value investor’s legacy
identifying value in the stock market is challenging, with the leading U.S. indices trading at or near record peaks. Charlie Munger was Warren Buffett’s partner for decades before he died in late 2023. Mr. Munger left a legacy as one of the world’s most influential value investors. His final advice on China was:
My position in China has been that: (1) the Chinese economy has better future prospects over the next 20 years than almost any other big economy. That's number one. (2) The leading companies of China are stronger and better than practically any other leading companies anywhere, and they're available at a much cheaper price.
So naturally, I'm willing to have some China risk in the Munger portfolio. How much China risk? Well, that's not a scientific subject, but I don't mind whatever it is, 18% or something.
Time will tell if Charlie Munger’s advice will yield significant returns over the coming years. China remains the world’s second-leading economy, hampered by geopolitical turmoil. Meanwhile, any warming of relations with the United States over the coming years or an economic recovery could cause a herd of buying in what Charlie Munger pointed out are “cheap” Chinese stocks.
Munger and Buffett have posted incredible returns by as Warren Buffett said, being “fearful when others are greedy, and greedy when others are fearful.” The price action in the Chinese large-cap stocks and the FXI ETF reflects significant fear in July 2024.
Levels to watch in FXI
The ten-year chart of the FXI ETF remains in a bearish trend in late July 2024.
While the FXI has bounced from the January 2024 $20.86 low, at around $25.50 per share, it has not broken out to the upside. The first significant technical resistance level is at the January 2023 $33.38 high, with the support at the early 2024 low.
Chinese stocks offer value, but they do not trade in a vacuum. Geopolitical concerns continue to weigh on the FXI and China’s large cap stocks. Charlie Munger left the world in late November 2023, but his advice was that the leading Chinese equities offered investors incredible value for the coming decades. Time will tell if the value investor’s final advice reflects his legacy as one of the world’s most successful value investors.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
