FXI ETF: China’s economy benefits from stronger dollar (NYSEARCA:FXI)


China

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A rising US dollar is pushing up inflation in many third world and developing countries. Most imports are paid in dollars, leading to high commodity prices, exacerbated by historical highs. oil price. The tragic event in Sri Lanka, which revealed anger at rising prices due to the depreciating rupee, is one example of how things can get thrown into chaos, but there are many more examples of how a strong dollar can throw people into chaos. You have more local currency in your wallet, but less food in your stomach.

China is currently Sri Lanka’s third largest creditor and should benefit most from a stronger US dollar and efforts to rehome US supply chains. For investors looking to profit from these two deployments, the iShares China Large-Cap ETF (NY SEARCA: FXI) in this paper.

First, before going into the details, I chose FXI because it performed -27.8% compared to its peers iShares MSCI China ETF (MCHI) and Invesco China Technology ETF (CQQQ) in the last trade. This is because the impact of was relatively small. year period.

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Performance comparison between FXI and peers (www.seekingalpha.com)

rising dollar problem

Although not necessarily taken advantage of, inflation appears to be more or less contained by the US Federal Reserve, resulting in optimism across the economy and benefiting the stock market. This, in turn, will bring prosperity to Americans, as a stronger dollar cushions the impact of higher commodity prices due to good job numbers. On the other hand, the highly valuable US dollar has meant a rise in the cost of living for many people in developing countries, leading to riots in the streets of some developing countries.

For investors, companies like Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX) and Nike (NKE) have already sounded the alarm about the impact of currency woes on their earnings. I’m here. Now, with America’s increasing focus on onshoring and rising interest rates, the dollar is likely to remain strong in the near future, so even Europe and Japan may find it difficult to import from the United States. world.

This is a boon not only for Chinese manufacturers, but also for other sectors of the economy such as consumer goods and banks. As shown in the chart below, the upward trend of China’s GDP over the past five years is closely related to the annual revenue growth of FXI’s top six holdings.

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Comparison of China’s GDP and FXI’s Top 6 Stocks Annual Earnings (ycharts.com)

Realistically speaking, ‘deglobalization’ could ultimately lead to a loss of U.S. market share and consequent reductions in dollar revenues, and Chinese companies may suffer. But trade restrictions have done little to curb top-line growth for major Chinese companies, as evidenced by sales growth since 2019, when the U.S. Department of Commerce began imposing high tariffs on Chinese goods. There was not.

On the contrary, they seem to have found alternative markets and should gain more traction in the developed markets of Europe in the future, in addition to many developing countries which are already strong, as we will discuss in more detail later.

But despite its strength, Chinese stocks remain a risky bet.

high volatility risk

The reason is that, like the United States, China also has ambitious goals to produce advanced semiconductor technology and compete with technology from Taiwan and South Korea. But China’s efforts dating back more than two decades have largely failed (OTCK:SSNLF).

As a result, both the U.S. and China have been forced to rely on Taiwanese semiconductor and electronics makers, leading to geopolitical tensions between the two countries, with ripple effects on Hong Kong’s stock market. Tensions rose further after House Speaker Pelosi’s visit to Taiwan, and Chinese and Taiwanese stocks are now subject to additional risk premiums.

Another reason for the volatility, especially for companies operating in the technology sector, is that Chinese regulators have imposed strict regulations and hefty fines on companies without a clear regulatory action plan. is doing In addition, issues affecting the real estate sector have dragged down financial firms’ performance. So, as you can see in the table below, they are all negative, whether it’s month-to-month or year-to-year performance.

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Comparison of key indicators for the top 6 stocks in FXI (www.seekingalpha.com)

However, looking at the three-year returns, there are some positives.

Thus, according to the International Monetary Fund, China accounts for about 18.8% of the world’s GDP based on PPP or purchasing power parity.

As a result, in addition to a stronger dollar, Germany’s share of global manufacturing also benefits from a weak German economy, with companies paying more for energy from Russia while their Chinese peers pay less. should increase. With Europe’s economic powerhouses under pressure, it’s becoming more likely that industries will move production to China.

return outweighs risk

As a result, the United States is keen to return the supply chains of critical components to its territory amid heightened geopolitical risks and a war affecting Europe’s major economies, and China is seizing the opportunities that come with it. But the country has its own set of problems, like a very restrictive Covid-zero policy, which prevents it from supplying the world’s top network makers such as Cisco (NASDAQ:CSCO) with electronic components. and Apple’s (NASDAQ:AAPL) supply of finished products.

These are large multinationals that have the means to redesign their supply chains to include countries such as Vietnam, India and Mexico. But that’s not the case for thousands of small businesses in the US and Europe, and moving away from cheap Chinese supply chains could mean a loss of competitive advantage. , reducing the influx of goods from China could pose an existential threat.

Therefore, after the Covid episode, China’s role in global supply chains should gain momentum again, thereby benefiting China’s manufacturing base. This should increase banking financial transactions and e-commerce sales in his ecosystem.

With a management fee of 0.74%, FXI gives you access to the largest 50 Chinese stocks in a single fund, unless you currently have access to research data on individual companies for some China-based companies. To this end, it tracks an index composed of large-cap Chinese equities traded on the Hong Kong Stock Exchange.

This is different from buying mainland Chinese listed shares traded on the Shanghai Stock Exchange or the Shenzhen Stock Exchange. These more domestic stocks form part of the iShares MSCI China A ETF (CNYA). Coming back to the volatility rhetoric again, investors will notice that CNYA is underperforming his FXI as shown in the chart below.

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Performance comparison between FXI and CNYA (www.seekingalpha.com)

This is primarily due to the fact that these two ETFs do not hold the same stocks, but the fact that they both hold Chinese companies means that Hong Kong-listed securities face additional geopolitical risks. This risk should continue to dominate, at least until Chinese equities are listed. The Communist Party Congress in October where important decisions are usually made.

But in the long run the returns outweigh the risks.

Conclusion

In the long run, China should continue to expand its economic influence beyond Africa and take advantage of the fact that a strong dollar is weighing on the economies of many countries around the world. As the U.S. focuses primarily on curbing domestic inflation, leading to a stronger currency, more supply chains may find sources in China, benefiting the country’s big companies that form part of FXI. . While there are Covid-related risks now, we are already facing higher food and energy prices, and more political leaders around the world are pledging to work with China to protect their citizens from the rapid inflation that will affect their economies. partnership may be established.

In a situation like this, it’s too late to buy the S&P 500 plunge, and for those with some spare cash, it’s worth diversifying partially in FXI. The ETF pays a dividend yield of 1.97% while waiting to rise. In this case, after a 26% decline over the course of a year, FXI could rise 10% based on the current stock price of $30.24 before flirting in the $33-34 range again. Another of its benefits is providing her one country’s perspective on the world’s second economy.



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