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  • Emerging Markets Equity

    Consumer Resurgence in China Drives Opportunities

    Carlos Diez, MarketGrader
    May 25, 2021
     

    At the end of April 2021, the MarketGrader China All-Cap Growth Leaders Index (MG China Growth Leaders) completed one year as the underlying benchmark for the VanEck Vectors China Growth Leaders ETF (GLCN). The index is designed to identify opportunities across the broad Chinese market, giving investors access to companies with consistent and sustainable growth and robust fundamentals in one of the world’s fastest growing economies.

    The Index consists of the 200 companies in China that score the highest according to MarketGrader’s proprietary scoring methodology, regardless of where their shares are listed. The MarketGrader score rewards companies with strong growth characteristics and sound fundamental indicators of quality, without overpaying for their shares.

    The recent March 2021 index rebalance highlighted two major trends that continue to develop:

    1. The Industrials sector continues to be the single strongest sector from a bottom-up perspective and is the highest weighted sector in the index.
    2. The resurgence of the consumer in China is shown in the net gain of eight constituents in the Consumer Discretionary sector. Additionally, this trend is evident when isolating the “new economy” sector complex, which includes Consumer Staples, Health Care and Technology. These sectors, taken together, account for almost 57% of the Index’s constituents.

    The index gained 6.6% (total return, USD) between its September 2020 and March 2021 rebalances, outperforming the CSI All Share Index, which gained just 4% over the period, but trailing the country’s large cap benchmarks, including the CSI 300 Index’s 10% gain and MSCI China’s 14.2%. Chinese equity returns became concentrated in the market’s largest stocks last summer, culminating in a market peak in February of 2021 that coincided with China’s Lunar New Year holiday.

    Cumulative Six-Month and 1-Year Total Return (USD)

    Index Sept. 2020 – March 2021 May 2020 – May 2021
    MarketGrader China All-Cap Growth Leaders (MGCNGRTR Index)  6.6% 44.4%
    CSI 300 Index (CSIR0300 Index) 10.0% 46.0%
    MSCI China Index (MXCN Index) 14.2% 37.1%
    CSI All Share Index (SH000985 Index) 4.0% 36.7%
    CSI 500 Index (CSIN0905 Index)  -0.2% 33.6%

    Source: Bloomberg. Rebalance period returns measured from 9/18/2020 through 3/19/2021. One-year returns measured from 4/30/2020 through 4/30/2021. All returns are price-only in USD. An index's performance is not illustrative of a fund's performance. Indices are not securities in which investments can be made.

    China Growth Leaders Entering the Index

    The five largest additions to the index in March were China Feihe Limited (Consumer Staples, 1.02% of GLCN holdings), Evergrande Property Services Group (Financials, 0.67%), China Galaxy Securities (Financials, 0.3%), Pop Mart International (Consumer Discretionary, 0.3%) and CSC Financial (Financials, 0.76%).1

    China Feihe Ltd. had the highest score based on a combination of strong fundamentals and attractive valuation. The company engages in the development, production and sale of infant formula milk and other dairy products and showed strength across the four categories calculated by the index provider.

    • Growth (A): The company's growth is remarkable and consistent from top to bottom line and across the near and long term. It has been doing very well lately, particularly on a trailing 12-month basis, with revenues that are not only growing but seemingly accelerating and very strong growth in operating income. Just as important, it is maintaining its operating margin, suggesting the company is not sacrificing profitability for the sake of growth at any price.
    • Value (B+): The stock looks inexpensive relative to its fundamentals, although additional upside may be limited.
    • Profitability (A): The company’s operations are running profitably, underscoring the strength of its business model. China Feihe's gross income represents 46.14% of total tangible assets, which shows how efficient it is at generating true economic profits, and placing it near the very top of MarketGrader’s Profitability rankings.2
    • Cash Flow (A+): Its cash flow is excellent, suggesting it has plenty of options to return capital to shareholders or pursue new initiatives. It reported $1.14 billion in operating cash flow for the 12-month period ended on December 31, 2020, up 48.21% from the comparable period a year ago and pared its capital expenditures pretty drastically in the last 12 months, cutting them by 45.84%.3

    Important Disclosures

    1 Source: FactSet as of 4/30/2021.

    2 Source: MarketGrader.

    3 Source: MarketGrader.

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    Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

    Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Certain indices may take into account withholding taxes. Investors can not invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses. Index returns assume that dividends have been reinvested.

    MarketGrader China All-Cap Growth Leaders Index consists of 200 companies domiciled in China that the index provider has determined exhibit favorable fundamental characteristics.

    The CSI 300 Index is a free-float market capitalization weighted index compiled and managed by China Securities Index Co. Ltd. consisting of 300 A-share stocks listed on the Shenzen and/or Shanghai Stock Exchanges.

    The MSCI China Index captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 704 constituents, the index covers about 85% of this China equity universe.

    The CSI All Share Index includes all the A-shares except ST stocks and *ST stocks and the stocks which has been listed less than three months.

    The CSI 500 Index consists of the largest remaining 500 A-Share stocks after excluding both the CSI 300 Index constituents and the largest 300 stocks.

    An investment in the VanEck Vectors China Growth Leaders ETF may be subject to risks associated with investments in Chinese securities, including A-shares, which include risk of the RQFII regime and Stock Connect program, foreign and emerging markets investments. In addition, the Fund is subject to foreign currency risk, non-diversification risk, and other risks associated with investing in the consumer discretionary sector, consumer staples sector, financials sector, industrials sector, swaps, futures, investing in other funds, small-and medium capitalization companies, cash transactions, equity securities, market, operational, index tracking, authorized participant concentration, no guarantee of active trading, passive management, fund shares trading, premium/discount risk and liquidity of fund shares and concentration risks, all of which may adversely affect the Fund.

    The Fund may gain exposure to the China A-Share market by directly investing in China A-Shares and investing in swaps that are linked to the performance of China A-Shares. An investment in the Fund involves a significant degree of risk, including, but not limited to, risk of the RQFII regime and the Fund’s principal investment strategy, investing in China and A-shares, investing through Stock Connect, foreign securities, emerging market issuers, foreign currency, consumer discretionary sector, consumer staples sector, financials sector, investing in swaps, futures, other funds, small-and medium-capitalization companies, cash transactions, equity securities, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversification, concentration risks and the Adviser’s and Sub-adviser’s ability to manage the Fund, which depends upon the availability of China A-Shares and the willingness of swap counterparties to engage in swaps linked to the performance of China A-shares all of which may adversely affect the Fund. The Fund may invest in derivatives, which entail certain risks, including counterparty, liquidity, and tax risks (including short-term capital gains and/or ordinary income). Foreign and emerging markets investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund’s returns. The Fund may also invest in shares of other funds and absorb duplicate levels of fees with respect to these investments. Small-and Medium-capitalization companies may be subject to elevated risks.

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  • Authored by

    Carlos Diez
    MarketGrader