MCHI: China Stocks Endure Sharp Losses As U.S. Equities Climb

China has completely rolled over in the last month. The iShares MSCI China ETF (NASDAQ:MCHI) is down a whopping 9% as the S&P 500 has rallied more than 8%. The world’s second-largest economy has endured strict Covid-related lockdowns over the last two-and-a-half years as the rest of the globe has reopened for business and pleasure.

One-Month ETF Performance Heat Map: China A Weak Spot

Second-quarter earnings season has been fascinating on many fronts, but one particularly cloudy situation was how multinational firms with significant revenue exposure to mainland China would operate amid such harsh social and economic restrictions.

Companies like Nike (NKE) and Starbucks (SBUX) are two of the most well-known firms doing business in China. The latter reported so-so numbers from its China division earlier this week. Optimistically, Yum China (YUMC) rallied in the face of the negative backdrop. Investors are left wondering if China is investable or not at the moment. Let’s dig into the iShares MCHI ETF which seeks to track the investment results of an index composed of Chinese equities that are available to international investors, according to iShares.

The fund is more than 30% invested in the Consumer Discretionary sector while Communications Services is the second-biggest weight. Unlike yesteryear, you do not get much resource exposure through the China stock market. Many consumer and tech/communications industries have been hit hard by a very hands-on (to put it mildly) Chinese government which aims to control a chunk of the business world within its borders.

China Equities: Sector Weights

Some of the biggest single-stock holdings of MCHI are down huge over the last 18 months. Bear in mind that emerging markets peaked in February of last year while the U.S. equity market did not top until early 2022.

MCHI Top 10 Holdings

Alibaba (BABA) is off more than 50% year-on-year while JD.com (JD) is a relative winner – down just 9%. The biggest stock in the fund is Tencent (OTCPK:TCEHY) which is down 33% on the one-year chart.

Big Red Among The Largest China Stocks YoY

Fundamentally, the China stock market trades at a low 10.9 forward P/E multiple. That’s well below its historical average over the past 25 years, according to J.P. Morgan Asset Management. Long-term investors should view this valuation quite favorably.

China Stocks: Cheap Vs History

The Technical Take

MCHI has been choppy since breaking down in March. I see resistance in the $56 to $57 range, and $43 to $45 is support. The ETF has had its fits and starts on a relative basis to the S&P 500, but I’d wait for MCHI to climb above $57 before getting aggressively long. Watch out below if $43 breaks – a trip to the $33 to $35 range could be in play.

MCHI: Trading Range Since March

The Bottom Line

I like China from a value perspective as a long-term holding, given its cheap valuation and lousy sentiment right now. The near-term technical picture is not impressive, though – particularly given its relative weakness over the last month. I would stay away for now, but this could be a bullish story later this year if MCHI can climb above resistance.