“It’s all a valuation issue for China right now, but I still like the tech names and I’m adding to my client portfolios,” says Rob Lutts, CIO of Cabot Wealth Management, an investment advisory managing around $600 million out of Salem, Mass. His two names: Alibaba (BABA 68,82 -0,79 -1,13%) and C-Trip (CTRP 41,25 +0,31 +0,76%).
Those tech names have pushed valuations higher on one hand, but on the other hand, big ETFs like the iShares FTSE China (FXI 24,02 -0,11 -0,46%) are overbought, regardless of investor fears of credit bubbles and U.S. protectionism. So far this year, the FTSE China ETF has beaten the S&P and the MSCI Emerging Markets.
Here’s the reason: big money managers are moving in. They believe global reflation and a domestic cyclical upswing will keep China interesting. Investors may want to wait for the big index funds to calm down a bit. Timing doesn’t look right for the index funds, based on momentum.
Chinese equity returns have not been great. They’ve trailed Chinese GDP since 2000. For now, Chinese stocks are supported by an accommodative and flexible monetary policy designed to stabilize growth before 19th Party Congress this fall. The nearterm upside of Chinese stocks may be capped by trade tensions, and recent price action suggests some China funds (FXI) are overbought. This pony can’t run forever. And when it slows down, it might be time to look over those Chinese speciality products.