China's Country Garden Contagion: ETFs to Lose/Win
China's real estate sector, once an economic powerhouse, now grapples with crisis, vital for China's recovery. Falling property values and rising unemployment deter home purchases, revealing weak consumer sentiment. Chinese real estate behemoth – Country Garden – once thriving, has been facing turmoil lately.
Debt issues escalated for Country Garden after its onshore bonds were suspended, another setback for policymakers striving to bolster confidence in a faltering economy. The suspensions resulted in the shares of the company falling sharply, hitting record lows, per a Reuters article.
Moody's Investors Service, as quoted on Reuters, on Aug 11, stated that the credit distress faced by Chinese private developer Country Garden is expected to have a ripple effect on both the country's property and financial markets.
JPMorgan hiked its 2023 global emerging markets corporate high-yield default forecast to 9.7% from 6% in a note dated Aug 15, as quoted on CNBC. It also raised its Asia high yield default rate forecast to 10% from 4.1% — that figure drops to just 1%, if China property is excluded.
The bank expects China property to make up about 40% of all emerging market corporate high-yield default volumes in 2023. JPMorgan expects China property to account for nearly 40% of all default volumes in 2023, followed by 35% from Russian corporates and 12% from Brazilian issuers.
Against this backdrop, below we highlight a few ETF investing options that could win/lose in the coming days.
ETFs to Lose
China – iShares MSCI China ETF (MCHI)
The underlying MSCI China Index is a free-float adjusted market capitalization weighted index designed to measure the performance of equity securities in the top 85% in market capitalization of Chinese equity markets, as represented by the H-Shares and B-Shares markets. The fund lost 4.4% past week (as of Aug 15, 2023).
Emerging Markets – iShares MSCI Emerging Markets ETF (EEM)
The underlying MSCI Emerging Markets Index measures the equity market performance in the global emerging markets. the Index consisted of the following 22 emerging market indexes: Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Malaysia, Mexico, Morocco, Peru, the Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand and Turkey. The fund charges 69 bps in fees and has lost 3.2% past week.
ETFs to Gain
Emerging Markets Dividend – SPDR S&P Emerging Markets Dividend ETF (EDIV)
Dividend investing offers a protection against sell-offs, which makes EDIV a better choice in the EM pack. The underlying S&P Emerging Markets Dividend Opportunities Index includes 100 tradable, exchange-listed common stocks from emerging market countries that offer high dividend yields. The fund yields 3.96% annually. The fund charges 49 bps in fees.
Long/Short Investing – Simplify Market Neutral Equity Long/Short ETF (EQLS)
The fund looks to provide positive absolute returns and income. A market-neutral strategy is one that seeks to profit during both rising and falling equity markets. By potentially profiting in either market environment, EQLS can offer considerable diversification benefits while maintaining an independent source of returns.
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iShares MSCI Emerging Markets ETF (EEM): ETF Research Reports
iShares MSCI China ETF (MCHI): ETF Research Reports
SPDR S&P Emerging Markets Dividend ETF (EDIV): ETF Research Reports
Simplify Market Neutral Equity Long/Short ETF (EQLS): ETF Research Reports
