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Can the Year of Monkey Bring Fortune to China ETFs?

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The Chinese economy has been at the crux of global issues for the last one year, though mostly for the wrong reasons. The economy expanded at the worst pace (6.9%) in 25 years in 2015. Issues like credit crunch, shadow banking activities, persistently faltering manufacturing activity and a weak domestic market spurred hard-landing fears about the economy.

Recap of the Goat Year

Though the afore-mentioned concerns kept cropping up at regular intervals over the last three years, it recently swelled up to take a gigantic shape. If this was not enough, China shook the global markets last August by devaluing currency by 2% and triggering an acute sell-off.

The Chinese central bank defended its currency intervention ‘as a free-market reform’, but the move was criticized by U.S. lawmakers and viewed as a way of taking undue favor in exports. Since then, then the Chinese market has been on a roller-coaster ride taking a toll on other markets globally.

Apart from this, to arrest the occasional and heavy market crash, the Chinese securities regulators rolled out a volley of measures, though those were not of much help. There was even a trading halt on the key Chinese bourses in January 2016, with the indexes diving 7% as part of a circuit breaker system. But since the measure only intensified volatility, China soon scrapped it. 

Notably, China’s manufacturing sector shrunk at its fastest clip in almost three-and-a-half years in the final month of the Goat year and also capped the contraction in the purchasing managers’ index for 10 successive months.

Preview of the Monkey Year

In this backdrop, the Chinese economy stepped into the year of the Monkey. Astrologers predict heightened volatility in the year of the Monkey (per the lunar calendar). Though the first half will likely be sluggish, things may improve in the second half, especially after August 8, per an astrologer.

Though we don’t want to go all astrological before investing in Chinese securities, the current trend validates the forecast. Economists also believe the same, especially about volatility in the first half.

All in all, China investing is replete with risks. But it’s not that there is no silver lining. After all, the Chinese currency yuan received a privileged reserve currency status from IMF recently and joined the league of the major currencies, namely the U.S. dollar, pound, euro and yen.

The government is resorting to loose monetary policies like rate cuts and all; though those have failed to push the economy to desired levels so far.  Also, the government is forming several international ties. Yes, these are all long-term phenomena. Over the short term, the market is expected to remain rocky (read: Policy Easing Puts China ETFs in Focus).

Most analysts are not hopeful of a rebound in the Chinese market. UBS stayed very cautious on China and believes that “China’s stock markets will see no gain in 2016”, meaning the most part of 2016 will be in red or it could just break even.

In such a situation, investors can try out the following ETFs, each because of their individual qualities.

ETFs to Watch

Short China

Investors outright bearish on the future developments of China, can go short by investing in Daily CSI 300 China A Share Bear 1x Shares (CHAD). Since the fund does not take any leveraged exposure, it is one of the safe inverse China ETFs by far.


Small-Cap ETFs

The economy is on a shifting mode from being export-driven to becoming domestic consumption-oriented to ward off foreign issues. Notably, increased domestic consumption is best tapped via smaller capitalization. So investors can take a look at the small-cap China A-Shares ETFs like Market Vectors ChinaAMC SME-ChiNext ETF (CNXT) with a Zacks ETF Rank #2 (Buy) and  Deutsche X-trackers HrvstCSI500CHN A SC (ASHS) with a Zacks ETF Rank #3 (Hold) (read: China A-Shares ETFs Explained).

Consumer ETFs

In October 2015, China practiced a demographic reform by scrapping its decades-long infamous one-child policy. Concerns over China's ageing population and the resultant shortage of workers and consumers prompted this move.

If this was not enough, many believe that being born in the year of the Monkey is more auspicious than being born in the Goat year. Both reasons might prompt a baby boom in the Chinese New Year. While companies selling baby-products will be the direct beneficiaries, the overall consumer segment should get a boost from this trend. Small-cap ETFs and the consumer fund China Consumer ETF (CHIQ) should be bid on if you are a believer of this trend (read: China Ends One Child Policy: Stocks & ETFs to Watch).

Technology ETFs

If you want to follow the astrologer blindly, go for tech and telecom stocks and the related ETFs (as suggested by them). Fundamentally, the rise of technology has been broad-based lately. Yes, U.S. tech companies are ruling the world, but Chinese tech leaders are also making huge forays. China Technology ETF (CQQQ) can thus be played if some bullish trends are established.

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