Chinese stocks soared this week after President Trump tweeted that he would delay tariff hikes, which were expected to go into effect on March 1, as U.S. – China trade negotiations are showing progress.
So far this quarter, Chinese markets are doing better than they have in years.
The Shanghai Composite is up more than 5% this week, and is likely to finish the week higher for the eighth week in a row. It’s also on track to have its best quarter since 2014.
Kevin O’Leary of “Shark Tank” fame, and chairman of O’Shares ETFs, said in a conversation with CNBC this week that exposure to emerging markets, specifically Asian markets, is critical right now.
“It’s so hard to catch the knife with China,” O’Leary said. “The volatility is twice what our market is, basically, and what I’ve learned is as an investor you’ve got to suck it up and take the pain. If you want to have 5, 10, 15 percent in the Asian markets, which you should, you’ve just got to get ready for volatility in your portfolio. And it hurts.”
“If you didn’t have an allocation through this whole volatility to emerging markets, specifically Asia,” O’Leary said, referring to the FXI China Large-Cap EFT, which sank 25% from its 52-week high set last February to 2018’s lows in October, only to rally around 16% since then, “you’re now going to underperform the global index by a material amount.”
“Having no exposure to emerging markets is always a mistake over a five-year period,” the shark said. “That’s what I’ve found. So you have to take the pain on volatility.”
Tim Seymour of Seymour Asset Management added that the sharp sell-offs last year have made for more attractive valuations for Chinese stocks.
“In the short term, I actually think that Chinese stocks are not only cheap but technically, you have the Shanghai through the 200-day [moving average] for the first time in over a year, you’ve got a lot of important technical factors that is their wind at the back,” Seymour said.
CNBC’s Bob Pisani discussed the two major Chinese ETFs, the FXI China Large-Cap ETF which includes 50 of the biggest Hong Kong-listed stocks including large industrials and state-owned businesses, and the MSCI China ETF (NASDAQ: MCHI), which includes mainland China-listed and U.S.-listed stocks including Baidu (NASDAQ: BIDU) and Alibaba (NYSE: BABA).
“They are sort of correlated,” O’Leary said. “The point is, if you want to own China, own them both because frankly, they’re not that different and if you want to get every name, these are the two that captures them. But there’s so many state-owned enterprises in there. That’s funky chicken stuff. That’s the problem.”
The FXI ETF is up around 15% so far this year and the MCHI is up nearly 18%.
“I like FXI because I think a lot of the Chinese banks are particularly cheap,” Seymour added, “and a lot of them look to be most vulnerable on the credit side in terms of a world where you’re starving them from liquidity.”