China, South Korea, and Taiwan had a notable H1 2017, with the MSCI country indices for these countries returning 23.7%, 28.3%, and 20.6% in the period respectively. Stocks from these three countries form over three-fourths of the MSCI Emerging Markets Asia Index and over 55% of the Emerging Markets Index.
But what has contributed to their individual performance?
Strong tech sector returns common thread
For assessing the performance of these three markets, let’s look at the following ETFs:
- iShares China Large-Cap ETF (FXI)
- iShares MSCI China ETF (MCHI)
- Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR)
- iShares MSCI South Korea Capped ETF (EWY)
- iShares MSCI Taiwan Capped ETF (EWT)
A common theme which has propelled all of the funds listed above is the information technology sector. To show its impact, we have selected three popular ETFs investing in China. As can be seen from the graph below, the MCHI has done far better than the FXI and the ASHR. While tech stocks form 37% of the MCHI’s portfolio, they comprise only 9% in the other two above-mentioned funds.
Meanwhile, both the EWY and the EWT have their biggest sector weightings in tech, and which also became the highest contributor to their returns in H1 2017.
Financials is the other sector which is either placed as the top or the second best contributor to all of these ETFs, except for the MCHI.
Though China, South Korea, and Taiwan have led Emerging Asia in the first half of this year, US investors have been a bit cautious about taking the single-country focused ETF route to gain from them. According to Bloomberg data, the EWT has seen the highest inflows among the aforementioned funds, amounting to $302 million in YTD 2017.
Though China comes second, the total YTD net inflow of $135.5 million is a pittance given the size of the funds and the overall market. Interestingly, among the China-focused funds above, only the ASHR has seen inflows this year; they’re worth $20.6 million. The MCHI and the FXI have seen the largest outflows among all US-listed China-focused ETFs in H1 2017, according to Bloomberg data.
The fund attracting the highest net inflows is the KraneShares CSI China Internet ETF (KWEB) ($244 million), followed by the KraneShares Bosera MSCI China A ETF (KBA) ($168 million). Given that their asset sizes stand at $533 million and $205 million respectively, these are sizable inflows, not counting stock price appreciation.
This shows that investors are no longer timid about venturing beyond broad-based funds investing in China. But it’s important to note that while the opportunistic investment in KWEB has paid off, returning 38% in H1 2017 due to the tech sector, the bet on KBA with a view to the inclusion of China A shares in the MSCI Emerging Markets Index has yielded only 13.6%.
Except for the EWT, KWEB, and KBA, US investors seem relatively hesitant at present to partake in Asia’s growth story.
In the next article in this series, we’ll see the story behind the numbers in Europe, an even more silent, but superlative H1 2017 stock performance.