Active ETFs Offer Potential to Look Beyond China's Short-Term Woes

China’s near-term outlook appears bearish from the outside. With ongoing protests and economic damage from lockdowns, the country could have difficulty transitioning away from its zero-COVID-19 policy.

The biggest challenge is that just 40% of China’s over-80 population has had all three COVID-19 shots. Since the latest sub-variants are more infectious than Omnicron, moving away from its zero-COVID-19 policy could lead to a sharp increase in deaths. As a result, President Xi and the government may find themselves in a tough spot.

At the same time, the zero-COVID-19 policy has led to significant economic damage. Domestic flights and road freight levels are down significantly following a sharp rise in lockdowns, while the urban youth unemployment rate soared to almost 18%. And, of course, many businesses have shuttered in the process, leading to a lower GDP.

That said, China still has long-term tailwinds, according to Matthews’ fund managers Michael Oh and Andrew Mattock. They recently noted that the country’s stock market has a variety of strong investments, and its skilled labor force promises to undergird secular economic growth. As a result., investors may be able to ‘buy low’ during the current crisis.

The Matthews Emerging Markets Equity Active ETF (MEM) invests at least 80% of its net assets in emerging market companies outside the U.S., Australia, Canada, Hong Kong, Israel, Jordan, New Zealand, Singapore, and most of Western Europe. Using deep, holistic analysis, the fund managers seek to capitalize on consumption and innovation trends.

 

Since its inception in July 2022, the fund has risen about 11.5%, outperforming the MSCI Emerging Markets Index by a wide margin. And with its 0.79% expense ratio, the fund is much cheaper than many other actively-managed funds focused on emerging markets.

Some of the fund’s most significant holdings include:
 

• Taiwan Semiconductor Manufacturing Co. – 5.9%
• Samsung Electronics Co. Ltd. – 5.6%
• Tencent Holdings Ltd. – 4.1%
• First Quantum Minerals LT – 3.6%
• FPT Corp. – 3.4%

China has come under significant pressure over the past month, contributing to a 23% drop in the iShares MSCI China ETF (MCHI) since the beginning of the year. While President Xi and the government face tough challenges ahead, Matthews’ fund managers believe that the long-term outlook remains intact and their fund can help investors capitalize.

Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.