Last weekend’s trade truce between the U.S. and China lifted a lot of boats this week, with the S&P 500 rising to a new all-time high on Monday, followed by the S&P, Dow, and the Nasdaq all closing at record highs on Wednesday.
In fact, Wednesday was the third straight record day for the S&P 500 as the index gained 0.8% to end the day at 2,996 points – just shy of that elusive 3,000 mark.
The Dow closed 0.7% higher at 26,966 points, marking this index’s first record since October. The Nasdaq gained 0.8% to close at 8,170 points, its first record since the beginning of May.
But while U.S. equities are surging higher, Chinese stocks have been left behind and are still looking quite cheap, giving investors a prime chance to play China.
“The truce that was struck over the weekend provides the opportunity for professional investors to come back into Chinese stocks,” KraneShares’ investment chief Brendan Ahern said to CNBC on Monday. “The trade war … overhang has depressed Chinese equities, and we believe that going forward, the truce provides a great entry point, a great opportunity for investors due to the depressed valuations on both an historical and relative basis.”
Right now, Chinese stocks are the cheapest they’ve been relative the to S&P 500 in 20 years on a price-to-book value basis, Ahern noted. And he knows what he’s talking about. KraneShares operates 16 China-focused ETFs—including the KWEB CSI China Internet ETF, which tracks shares of companies including Tencent (OTC: TCEHY) and Alibaba (NYSE: BABA)—with $2.5 billion assets under management.
But this cheapness, according to Ahern, is also a sign that there could be a rally back to March highs for Chinese stocks in the near term.
“The overhang of the trade war has kept the Chinese internet and e-commerce companies, the companies that are the transmission for domestic consumption in China,… down,” Ahern said.
“We really love KWEB today,” Ahern said. The ETF has gained 3.36% over the last week and just over 15% over the last month.
“Look at the non-manufacturing [purchasing managers’ index] we got overnight. It’s still in expansion territory. Retail sales in the month of May was up over 8%. The earnings of the companies we saw from our portfolios, very, very strong. The Chinese consumer is alive and well, we’ve just had the overhang of the trade war. If that dissipates, I think these names [and] KWEB can go on a run here,” Ahern said.
On the flip side, Mary Ann Bartels—Bank of America Merrill Lynch’s head of ETF strategy—isn’t as bullish, at least not in the near term.
“We’ve kind of had some data come out of China, some green shoots, just like Brendan [Ahern] mentioned, that are actually positive,” Bartels said. “When you do look at not only China, but emerging markets, they’re really at extreme, depressed valuations.”
However, “we aren’t expecting a trade negotiation anytime soon,” Bartels continued. “We think this is going to be long and drawn out. But for those investors that can take a very long time horizon and withstand volatility, taking a look at the emerging markets, which would include China, might be appropriate.”