Chinese stocks have been under pressure ever since President Trump declared a trade war on the country's exports two years ago.
Now, it's a much different issue that's impacting them.
The coronavirus continues to spread and has now sickened hundreds of Chinese residents with the full impact of it yet to be fully known. Many compare it to the SARS virus, which ultimately resulted in nearly 800 deaths.
On the economic side, China's GDP was reduced by about 0.8%, mostly as a result of the virus and the loss of worker productivity, tourism, etc. There's obvious concern that the coronavirus could have a similar impact on the Chinese economy again.
The price of the iShares China Large-Cap ETF (FXI) reflects that worry.
It's down around 6% from peak to valley in just a couple short days. Any positive trade-related momentum is long gone and this will be the driver of equity returns in the short-term.
Whether this is a buy-the-dip opportunity or a "get out" moment depends on your views of how serious this virus is. We've seen a number of events like this occur at various moments in the past (SARS outbreak in 2003, swine flu in 2009) that have lasted for months at a time before finally coming to a conclusion.
Right now, I think panic is at its highest, but I'm encouraged that the WHO has yet to declare a global health emergency. Granted, it could be just a matter of time, but I believe that ultimately the virus will be contained and impacts will be short-term in nature.
That could mean a month or two or it could mean a week or two, but Chinese stocks will bounce once we get word that the worst of the coronavirus is in the past.
How To Play It In Your Portfolio
Based on that, I'd recommend overweighting allocation to China stocks.
It could be a bumpy ride in the short-term and we may not yet be at the bottom, but as it stands right now I believe China stocks are at a 6% discount relative to where they should be.
If this gets resolved quickly, it's likely a quick trip back to $45 for FXI, but it's also just as likely that it could take some time.
Other ETFs To Consider
- iShares MSCI China ETF (MCHI)
- SPDR S&P China ETF (GXC)
- Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR)
- Invesco China Technology ETF (CQQQ)
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