Stifel Bets ETF to Beat Star Philippines: China Overnight

Chinese exchange-traded funds will lead gains among Asian peers this year as inflows increase amid a recovery in the world’s second-largest economy, according to Stifel Nicolaus & Co.

Chinese ETFs attracted about $1.2 billion in the first three weeks of 2013 as data showed China’s economy has emerged from its seven-quarter slowdown. Funds have recorded inflows for 13 of the 16 days through Jan. 23, a record streak, according to data researcher EPFR Global. The iShares FTSE China 25 Index Fund’s 19 percent total return last year trailed the 48 percent jump in the iShares MSCI Philippines Investable Market Index Fund, which delivered the highest total return among iShares’ Asian emerging-market ETFs in 2012.

“We saw a lot of hot money flowing into the Philippines and Thailand ETFs, especially in the third and fourth quarters last year,” Dave Lutz, head of ETF trading at Stifel in Baltimore, said by phone Jan. 9. “Lately we’ve been seeing a big rotation back into China as their economic performance started turning for the better.”

The iShares FTSE China ETF, which tracks 25 stocks including China Mobile Ltd. and Cnooc Ltd., dropped 1.4 percent last week, paring its advance this year to 1.6 percent. It has rebounded 28 percent from a Sept. 5 low. The Bloomberg China-US Equity Index of the most-traded Chinese companies in the U.S. fell 2 percent last week to 99.61, led by Ambow Education Holding Ltd. and International Ltd.

Solid Inflows

Chinese manufacturing is expanding at the fastest pace in two years, according to an HSBC Holdings Plc and Markit Economics index released last week. Data issued Jan. 17 showed the world’s largest exporter had emerged from its seven-quarter slowdown, with the economy expanding 7.9 percent in the last three months of 2012, the first acceleration in two years.

“People know very little about China, but they know that this is an investment to be done,” Laurent Kssis, an ETF trading specialist at Bluefin Europe LLP in London, said by phone on Jan. 23. “The conditions are good, the markets are good. It’s definitely a fund where investment has gone in and inflows have been very solid.”

The Philippines benefited from a recovery last year, with the economy growing 7.1 percent in the third quarter, the fastest pace since 2010. The Philippine Stock Exchange PSEi Index rallied 33 percent in 2012.

Underlying Indexes

The average valuation for companies on the FTSE China 25 Index is 9.8 times reported earnings, versus 20.8 times for the MSCI Philippines Index. The China gauge’s 53 percent discount relative to the Philippine measure compares with a five-year average 21 percent gap.

Companies on the MSCI Thailand Index trade at a multiple of 15 times earnings. Thailand’s Bangkok SET Index rallied 36 percent in 2012, trailing only Pakistan among 13 Asian equity markets tracked by Bloomberg.

Inflows into China ETFs this year are more than double last year’s $535 million, EPFR data show. Philippines ETFs have seen inflows of $10.7 million in 2013, while Thailand-focused funds have seen $23.3 million of outflows.

“China’s stock market has not been one of the better performing ones, but things seem to be turning around more recently,” Ian Wilson, the managing director of fund data at EPFR, said by phone from Richmond, Virginia on Jan. 23. “There is more confidence that China is going to continue to pick up steam through 2013.”

Focus Media

The Shanghai Composite Index of domestic shares lost 1.1 percent last week, paring its advance in the year to 1 percent. The measure added 3.2 percent last year. The Hang Seng China Enterprises Index of Hong Kong-traded Chinese shares declined 0.9 last week, trimming its yearly advance to 5 percent.

Shanghai-based Ctrip, China’s largest web search travel agency, sank 20 percent in the week ended Jan. 25 as it revealed plans to cut about 500 employees and a Travel Daily report said the company will extend a program of cash rebates for airline tickets. Ambow, a private tutoring service provider based in Beijing, retreated 11 percent for a fifth weekly decline.

Focus Media Holding Ltd. gained 0.4 percent in the week, erasing a 3.1 percent decline on Jan. 24 amid concern a U.S. Securities and Exchange Commission investigation into potential securities law violations would endanger China’s biggest leveraged buyout.

A consortium of investors, led by the Carlyle Group LP, which had agreed to buy the Shanghai-based advertising company for $3.7 billion, said it’s “comfortable” moving ahead with the transaction, Randall Whitestone, a spokesman based in New York, said by e-mail Jan. 24.

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