ASHR: Silver Linings To The China Weakness (NYSEARCA:ASHR)

After a promising start to the ‘year of the dragon’, in part helped by large-scale ETF purchases by the ‘Chinese national team’, benchmark onshore indices are now back below their ‘floor’ (speculated to be 3,000 for the Shanghai Composite). The root of the issue remains the economy, where deflationary forces, as evidenced by a steep deceleration in credit and money supply growth, appear to have taken hold. Policymaking has, unfortunately, been nowhere near forceful enough to address this slowdown. Last month’s Politburo meeting was a case in point, as while Beijing did reiterate a commitment to +5% real GDP growth (vs +4.7% YoY in Q2) this year, and by extension, some degree of implied policy easing in the back half, there was little in the way of policy implementation details. So far, there have been more surprise interest rate cuts (despite the central bank’s efforts to simultaneously prop up bond yields) but nowhere near enough to offset weakness across property and consumer confidence.

But the stock market is not the economy. For equities, it’s worth noting that despite the macro troubles, large Chinese corporates are still poised to see good earnings growth. Of note, MSCI China is still pegged to deliver forward earnings growth of +14%/+12% for 2024/2025. Against this backdrop is a deeply skeptical ‘Mr. Market’ that seems to be already discounting some big downward revisions at the current sub-9x P/E valuation. Couple that with the fact that benchmark onshore indices are now well below the national team’s ‘floor’, and you have a potentially interesting near-term setup for Xtrackers’ Harvest CSI 300 China A-Shares ETF (NYSEARCA:ASHR). In line with my prior coverage (see ASHR: China May Finally Be ‘Investable’ Again), I think ASHR is still worth a look as a short-term tactical play.

ASHR Overview – A Large and Highly Liquid Mainland China ETF

Fundamentally, not too much has changed for the DWS-managed Xtrackers Harvest CSI 300 China A-Shares ETF. As this remains one of the few funds tracking China’s flagship onshore benchmark, the capitalization-weighted CSI 300 Index, ASHR tends to rank right at the top as a vehicle for A-Share (i.e., listings in mainland China) exposure. For context, the CSI 300 Index selects its constituents from the largest (per average daily total market capitalization) and most liquid (based on average daily trading value) stocks traded across both the Shanghai and Shenzhen Stock Exchange.

The big change, though, is that managed assets have declined quite a bit since I last covered the fund, to $1.3bn (vs ~$1.7bn prior). Still, spreads are fairly narrow, and at 0.65%, ASHR’s fee structure remains competitive. While not the largest and most liquid China fund overall (that remains iShares’ MSCI China ETF (MCHI)), relative to A-share ETF comparables like iShares’ MSCI China A ETF (CNYA) and KraneShares’ Bosera MSCI China A 50 Connect Index ETF (KBA), ASHR still has the edge on overall cost (fee + execution).

ASHR Portfolio – Still the ‘Middle Ground’ Option

In line with the CSI 300 Index it tracks, ASHR goes through a rebalancing every six months – the latest being in May. Per the fund’s updated sector breakdown, though, there hasn’t been much change at the top, with Financials (23.1%) and Industrials (16.3%) still the key exposures. There were some slight reshuffles elsewhere, with the third-largest sector, Information Technology (14.6%), gaining at the expense of Consumer Staples (11.9%). In total, ASHR’s top-five sector concentration stands at a relatively large ~74% – lower than 50-stock KBA but higher than >480-stock CNYA.

As for the single-stock breakdown, the year-to-date underperformance suffered by spirits franchise Kweichow Moutai, historically the top ASHR holding, has led to its downsized 5.1% weighting. The next largest holdings, battery manufacturer CATL, Ping An Insurance (OTCPK:PNGAY), and China Merchants Bank (OTCPK:CIHKY), have also lost portfolio share to the likes of utility company China Yangtze Power. Like last quarter, the ASHR portfolio makeup reinforces its ‘middle ground’ approach – while not as balanced as CNYA, it does present a more cycle-proof approach relative to the highly concentrated KBA, which tends to be more sensitive to cyclical swings.

ASHR Performance – Signs of Topping Out, but There are Silver Linings

Performance-wise, much like the other China ETFs, there’s been little to write home about with ASHR. And with the macro/micro momentum stalling out in recent months, it was perhaps not too surprising that ASHR has begun to pull back after a promising start to the year. Per latest reporting, the fund is about flat year-to-date – behind the more concentrated KBA, which has benefited from a narrowing market in China, but ahead of the more diversified CNYA. As for the overall compounding rate since its 2013 inception, this remains positive (+3.0% per annum), though much of the positive return came from ASHR’s early years; more recent three and five-year NAV returns are firmly in the red at -12.6% and -1.9%, respectively.

To be clear, there are still positives here. At the fund level, DWS continues to do a good job of tracking its benchmark CSI 300 Index. And the distribution rate, helped by last year’s increase to $0.59/share, equates to a very decent ~2.5% yield.

The key silver lining, though, remains the pricing, which reflects rampant pessimism on the future earnings outlook. Case in point is that, relative to forward earnings growth of +14%/+12% in 2024/2025, Chinese large caps are now priced at a trough-level sub-9x P/E.

Besides the fundamentals, there’s also a technical tailwind from state-linked share purchases to consider – particularly with the Shanghai Composite Index now well below 3,000 (i.e., the speculated threshold for state intervention). As the CSI 300 benchmark tends to be a key ‘national team’ focus, ASHR remains a great way to play a potential relief rally.

Silver Linings to the China Weakness

Nominal GDP growth is slowing in China and so far, fiscal/monetary stimulus out of Beijing hasn’t been enough to turn things around. The market has retraced in reaction to this deteriorating macro reality and possibly on worries of a Trump victory scenario. But given where equity pricing is relative to earnings growth, it’s hard to overlook the value in Chinese large-caps. Combined with the prospect of state-linked intervention now that onshore indices have breached key support levels, ASHR might just make sense as a tactical play here.