China ETFs post best week on record after Beijing fires policy 'bazooka' to boost economy. Is it time to jump in?

By Isabel Wang

China's economic recovery plus the Fed's easing cycle and a soft landing for the U.S. are crucial for emerging-market stocks, say analysts

Hello! This is MarketWatch reporter Isabel Wang, bringing you this week's ETF Wrap. In this edition, we look at China-related ETFs and emerging-market funds - which surged over the past week after Beijing unveiled a stimulus package aimed at reviving the country's flagging economy - and why investors should treat this rally with caution.

Please send tips or feedback to isabel.wang@marketwatch.com or to christine.idzelis@marketwatch.com. You can also follow me on X at @Isabelxwang and Christine at @CIdzelis.

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Exchange-traded funds that hold Chinese equities soared this past week as investors cheered Beijing's commitment to arrest a slowdown in the world's second-largest economy. Investors are eager to know if the long-anticipated recovery in Chinese stocks has finally arrived.

The iShares MSCI China ETF MCHI and the iShares China Large-Cap ETF FXI surged around 19% this week to post their best weekly performance on record. Meanwhile, the Invesco Golden Dragon China ETF PGJ and KraneShares CSI China Internet ETF KWEB were up 23.3% and 26.8% in the same period, respectively, with both logging their best week since 2022, according to Dow Jones Market Data.

Broader emerging-market funds also rose this week, with the iShares MSCI Emerging Markets ETF EEM up 6.7%, according to FactSet data.

See: Chinese stocks soar on stimulus plan. Can the rally continue?

On Tuesday, the People's Bank of China (PBOC) said it would cut interest rates and lower the amount of cash that banks need to hold in reserve, in a bid to kickstart its ailing economy. Policymakers also said they would reduce the interest rates on existing mortgages and lower the down-payment ratio for second-home purchases.

But that's not all. Two days later, China's top political leaders pledged to deploy "necessary fiscal spending" to pull the economy back toward the government's annual growth target of 5% and stabilize its battered property sector. While the government did not offer details on fiscal spending, Reuters reported late Thursday that China plans to issue special sovereign bonds worth about 2 trillion yuan ($284.43 billion) this year as part of a fresh fiscal stimulus to boost consumption and help local governments tackle their debt problems.

See: China stock-market jump may be 'tradable rally' - but approach with caution

Can Beijing 'follow through' this time?

Investors now are wondering whether Beijing's stimulus bazooka will provide enough fuel to turn around a beaten-up Chinese stock market and, more importantly, the economy.

"The reason that the market has reacted so strongly is that there's been a very clear change in the tone of policymakers in Beijing, which is the best sign yet that we're on the verge of getting the kinds of stimulus that the market wants," said Phillip Wool, chief research officer and head of portfolio management at Rayliant Global Advisors.

However, Wool said that whether the stock rally will pick up more steam from here depends on whether Beijing "follows through" and "actually implements detailed policies based on what they've said."

Over the past year, China has rolled out a slew of economic stimulus measures aimed at boosting the economy, but disappointing data over the past few months still raised concerns over a prolonged structural slowdown. That's why investors have been clinging to hopes that China will deliver a massive fiscal stimulus package - a policy tool used by Beijing to great effect in 2008.

Chinese equities have trailed the U.S. and other emerging markets over the past year, with the China-focused MCHI losing 2% over the 12 months through last Friday, compared with the S&P 500's SPX 30% advance and the iShares MSCI Emerging Markets ex-China ETF's EMXC 19.3% gain in the same period, according to FactSet data.

Scott Ladner, chief investment officer at Horizon Investments, said the "Chinese equity-centric market reaction" over the past three days has left some investors "confused," as they haven't yet seen a global stock-market rally after China finally pulled the "fiscal bazookas out to reflate their economy."

In Ladner's view, the "powerful pro-growth signal" from Chinese officials should have significantly buoyed European stocks, U.S. small caps and value stocks, but their reactions were relatively muted. "It's not the kind of cross-market reaction investors expect to see," he told MarketWatch via phone on Thursday.

See: David Tepper is buying 'everything' in China: 'ETFs...futures...everything'

What interest-rate cuts from the Fed and PBOC mean for emerging markets

China has increasingly been left out of actively managed emerging-market ETFs this year, with funds that exclude Chinese assets outpacing broader emerging-market ETFs and China-focused ETFs, according to FactSet data.

But China's economic recovery, along with the Federal Reserve's monetary-easing cycle and an accompanying soft landing for the U.S. economy, are crucial for emerging-market stocks, said analysts. The Fed last week delivered its first interest-rate cut in four years, which gives more room for emerging-market central banks like the PBOC to implement a relatively loose monetary policy without having to fear a sharp decline in their domestic currencies, said Ladner.

See: Fed's big rate cut helped lay groundwork for China stimulus, now watch other emerging markets: Evercore ISI

"Stock valuations in the emerging markets are baking in too much pessimism about the global economy. ... We get Fed easing with a soft landing, and the dollar DXY is weakening, which is a perfect storm for emerging markets' outperformance," Wool told MarketWatch in a phone interview on Thursday.

As usual, here's your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good...

   Top performers                                                                                                                                                                         %Performance 
   Sprott Uranium Miners ETF                                                                                                                                                              12.1 
   Global X Uranium ETF                                                                                                                                                                   10.7 
   iShares China Large-Cap ETF                                                                                                                                                            9.0 
   KraneShares CSI China Internet ETF                                                                                                                                                     8.9 
   United States Natural Gas Fund LP                                                                                                                                                      8.5 
   Source: FactSet data through Wednesday, Sept. 25. Start date Sept. 19. Excludes ETNs and leveraged products. Includes NYSE-, Nasdaq- and Cboe-traded ETFs of $500 million or greater. 

... and the bad

   Bottom performers                  %Performance 
   ARK Genomic Revolution ETF         -7.2 
   SPDR S&P Regional Banking ETF      -6.2 
   iShares Mortgage Real Estate ETF   -5.4 
   iShares U.S. Regional Banks ETF    -5.1 
   SPDR S&P Bank ETF                  -5.1 
   Source: FactSet data 

New ETFs

Texas Capital Bank Private Wealth Advisors on Wednesday announced the launch of the Texas Capital Government Money Market ETF MMKT, which holds highly liquid, short-term U.S. government debt instruments and cash equivalents, according to the firm's press release. Pacer ETFs on Tuesday launched the Pacer Metaurus Nasdaq-100 Dividend Multiplier 600 ETF QSIX, which is designed to provide investors with 600% of the ordinary dividend yield of the Nasdaq-100 NDX in exchange for modestly lower exposure to the tech-heavy index.

Weekly ETF Reads

Bond ETF flows this year just topped annual record set in 2021 (MarketWatch)Uranium ETFs rally amid plans to revive nuclear reactor in Microsoft agreement (MarketWatch) Greater China is now a 'growth engine' for Asia ETFs, BBH says (Financial Times) The $6.3 Trillion Money-Market Industry Just Got Its First ETF (Bloomberg) Rate Cut Kickoff Sparks Rush to Emerging Market Bond ETFs (Bloomberg) Are Low-Volatility ETFs Dead? (MorningStar)

-Isabel Wang

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09-27-24 1645ET

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