U.S. investors are missing out on the biggest stock rally in the world.
As the Hang Seng China Enterprises Index climbed 22 percent this year, traders were caught off guard, pulling about $100 million from the largest China exchange-traded fund in the U.S. over the span, according to data compiled by Bloomberg. Even with the withdrawals, assets in the fund have surged to more than $7 billion as Hong Kong’s H-share market soared.
The Shanghai Composite Index climbed to a seven-year high in a frenzy of stock purchases by Chinese investors as the government eased monetary policy to counter a slowdown in the world’s second-largest economy. The advance pushed the yuan-denominated A shares to the most expensive level in three years last month versus their dual-listed Hong Kong counterparts, leading international investors to speculate that the valuation gap would narrow through a retreat in mainland stocks rather than gains in the Hong Kong market.
The H-share rally “has absolutely caught people by surprise,” Michael Shaoul, who helps oversee $10 billion as chief executive officer of Marketfield Asset Management in New York, said by e-mail on Monday. “A closing of the gap seemed increasingly likely to take place. But most people thought it would come about via a collapse of the A-share market.”
The A-share premium has slipped to 21 percent from its March 26 high of 36 percent, according to the Hang Seng China AH Premium Index. Purchases by local Chinese investors through an exchange-link program have fueled gains in Hong Kong amid bets the valuation gap will narrow. The Hang Seng China gauge’s 25 percent surge in the past month was the best performance among 93 global stock benchmarks tracked by Bloomberg. The index slipped 2.2 percent on Tuesday.
U.S. investors are now returning to the iShares China Large-Cap ETF after it jumped 24 percent since mid-March, adding about $90 million on April 10 for the biggest one-day inflow since August. The fund tracks the 50 largest Chinese stocks trading in Hong Kong.
Another BlackRock Inc. fund, the iShares MSCI China ETF with $2.3 billion in assets, has attracted $636 million this year to provide investors with exposure to the Hong Kong rally. The MSCI ETF invests in 140 companies listed in the former British colony.
The smaller ETF is more attractive because it reaches deeper into the offshore China market, and its 0.61 percent expense ratio is “among the cheapest options for China exposure,” according to a Bloomberg Intelligence report.
The Hong Kong index for Chinese companies rallied 10 percent last week, the biggest gain since October 2011, sending the benchmark to a four-year high of 13,987.53. That rally has spread to the nation’s companies listed in New York, stoking a 7 percent record gain in a Bloomberg index of the most-traded Chinese stocks in the U.S. The iShares Large-Cap ETF fell 1.6 percent to $50.52 as of 10:02 a.m. in New York Tuesday, retreating from a May 2008 high.
The rallies in Chinese stocks aren’t supported by the outlook for the economy or business performance, according to Michael Wang, a strategist at Amiya Capital LLP in London.
China’s exports unexpectedly slumped the most in more than a year in March, government data showed, adding pressure on its economy, which expanded at the slowest pace in 24 years. Gross domestic product data scheduled for Wednesday will probably show the economy expanded 7 percent in the first quarter from a year earlier, according to the median estimate of 38 economists in a Bloomberg survey as of April 10.
“Many people certainly didn’t expect the rally to this extent,” Walter Todd, who oversees about $1 billion as chief investment officer for Greenwood, South Carolina-based Greenwood Capital. “When you have a momentum-driven move in an asset, which is what we have here, that can go on longer than the fundamentals might dictate.”