Still ‘Plenty of Upside’ in China Trade, Says BTIG

The China trade has shown strong performance over the past year, though the journey has not been straightforward, according to analysts from BTIG.

From the lows recorded in late January to the highs reached in mid-May, the iShares China Large-Cap ETF experienced a 41% surge. Following this, it faced a downturn of 17% through August before rallying again with a 22% increase to achieve new 52-week highs.

Relative to other benchmarks, the iShares ETF has risen 24% year-to-date, surpassing the 20% gain of the S&P 500. In contrast, the higher-beta KraneShares CSI China Internet ETF has struggled, gaining only 9.4% so far this year.

Analysts noted, “When we look at the big picture, we believe there is still significant upside potential in this trade.”

In 2023, the Hang Seng Index was wrapping up its fourth consecutive year of losses. Historically, since 1965, the index has only posted three consecutive years of decline on two occasions: in 1967 and 2002.

The five years following the downturn in 1967 saw returns of 62%, 44%, 36%, 61%, and 147%. After 2002, the index gained 35%, 13%, 4%, 34%, and 39%.

While this is a limited sample size, BTIG analysts suggest that given current sentiment and positioning, “it’s not hard to imagine a decent run for China here.”

The iShares ETF recently reached a new high for 2024 and is on the verge of surpassing its August 2023 high. If it breaks through this level, it would complete a significant base and confirm a long-term double bottom, indicating potential upside toward a target of 40—a 32% increase.

Meanwhile, the KraneShares ETF has opportunities to rebound to its May highs of 32.60 in the near term, with its 2023 peak of 36 still ahead.

The analysts acknowledged, “It’s always challenging to buy something after it has significantly increased.” They concluded, “Often, the hardest trade is indeed the correct one, and we believe that’s the case here—a breakout worth pursuing.”