China ETFs Slide Following JP Morgan Downgrade
Shares of the iShares FTSE China 25 Index Fund (NYSE: FXI), the largest China ETF by assets under management, are off about 1.5 percent Monday.
News that the tiny European nation of Cyprus is teetering on the brink of bankruptcy and could see a run on its banks would appear to be the obvious catalyst weighing on FXI and other China ETFs. After all, Eurozone drama has a tendency to weigh to on emerging markets equities.
Regarding the glum action in China ETFs today, there is more to the story. Overnight, JPMorgan downgraded its view of Chinese stocks to Underweight from Neutral.
"Growth momentum is now slowing with policy response constrained; a nasty combination," said Adrian Mowat, the bank's chief Asia and emerging markets strategist in a note obtained by Bloomberg.
The downgrade is adding to FXI's woes. With Monday's slide, the $7 billion ETF is down 12 percent year-to-date, affirming the notion FXI is in the midst of a correction. Technical analysts consider a security to be in correction mode after falling 10 percent or more from its most recent high. FXI flirted with $42 as recently as early February, but now languishes below $37.
FXI is not alone among slumping China ETFs. The $61 million Guggenheim China Real Estate ETF (NYSE: TAO) is down more than eight percent in the past month as speculation has increased Chinese policymakers will take steps, possibly including tighter monetary policy, to cool overheating residential real estate markets within the world's second-largest economy.
Home prices climbed in 62 cities of the 70 the government tracks in February from a year earlier, Bloomberg reported, citing China's statistics bureau.
Diminished appetite for Chinese equities has predictably weighed on small-caps, which carry higher perceived risk. The Guggenheim China Small-Cap ETF (NYSE: HAO) is down about seven percent in the past month, not a big enough slide for an official correction, but selling pressure appears to be intensifying in that ETF.
Including Monday's 1.11 percent slide, HAO is off 4.73 percent in just the past five trading days. HAO's chart is also weak, showing no obvious support areas until the 200-day moving average, which is eight percent lower than where the ETF currently resides.
Active investors looking for a short-term hedge on long China positions or to profit from extended weakness in FXI can consider the ProShares UltraShort FTSE China 25 (NYSE: FXP). FXP is the double-leveraged inverse equivalent of FXI. That is to say FXP seeks to deliver twice the daily inverse returns of the index FXI tracks.
Over the past month as FXI has lost about 6.5 percent, FXP has done an admirable job of delivering twice those inverse returns having surged 12.6 percent over the same time. Today, FXP is up 2.8 percent on volume that is already at the daily average. Year-to-date, FXP has climbed 24.3 percent.
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