Chart: China Sectors Show Wide Dispersion in 2019

In 2018, market turbulence, escalated trade tensions, and fears of a global slowdown caused China’s equity markets to struggle. In 2019 however, China has reversed course, with each of its 11 GICS sectors in positive territory and Chinese sectors up 13.4% YTD on average, outperforming the MSCI Emerging Markets Index, which returned 8.91% YTD.1 Strength from China has largely come from improved EM sentiment, the Fed pausing its rate hikes, muted fears around a global slowdown, aggressive stimulus by the Chinese government, and positive developments in the ongoing US-China trade negotiations.

Yet as we discussed in our recent post, Embracing China’s Growth with a Sector Based Approach, China’s sectors do not all move together. In the chart below, we show the performance of Global X ETFs that are designed to track China’s 11 GICS sectors relative to CHIL, a large cap ETF tracking the 50 largest stocks in China, which is up 13.38% YTD.

Performance shown is past performance, based on the NAVs of the underlying sector ETFs and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold, may be worth more of less than their original cost and current performance may be lower or higher than the performance quoted.  To view standard performance each of the funds, please click on links available under “Related ETFs” below this post.

As demonstrated in the chart above, the difference in returns between the best and worst performing sector ETFs in China is 19.10% just two months into the year. For context, the difference between the best and worst performing sectors in the US so far this year is only 10.30%.2 The ETF tracking China’s Information Technology sector has led with returns 26.80%, while Utilities have lagged at 7.70%.

Such wide sector dispersion has been driven by two key catalysts: US-China Trade Negotiations and China’s stimulus efforts.

  • US-China Trade Negotiations: the delay of additional tariffs and positive sentiment around negotiations has bolstered Chinese equities broadly, but has had a disproportionately strong effect on sectors most exposed to tariffs. Headlining these sectors is Information Technology (CHIK), which is an industry dominated by electronics, semiconductors, and software firms that are under scrutiny for intellectual property theft and forced technology transfers. Other tariff-sensitive areas include autos, which represent around 30.00% of the Consumer Discretionary sector (CHIQ). While US-China trade negotiations have been the most prominent driver, both sectors have also benefited from campaigns by China and the EU to prevent further tariffs, improved relations with Japan, and concrete efforts to fortify supply chains and trade spanning Africa, Asia, Latin America, and the Middle East
  • Policy Coordination: China’s government and Central Bank use extensive policy mechanisms to support key industries through monetary policy, fiscal policy, and regulation. Recently, China’s central bank has sought to support economic growth by lowering bank reserve requirements to support the Financials sector (CHIX). China’s government also implemented tax reforms to encourage greater consumption, supporting the Consumer Discretionary sector (CHIQ), while promoting infrastructure projects to backstop growth, which favors the Materials sector (CHIM).

US-China trade tensions may affect broad performance across China, but individual sectors are affected differently. In addition, macro-economic events and domestic stimulus can further drive a wedge between China sector performance. As China becomes an increasingly important economy for global markets, we believe arming investors with efficient tools to access each specific sector in China should allow for more nuanced and targeted approaches to invest in the world’s second largest economy.

Related ETFs