SPEM - ECNS: Small-Cap China A Good Cyclical Value Play

2024-05-30 07:14:00 ET

Summary

• Small-cap Chinese stocks are cheap and have broken out of their downtrend, making them a potential opportunity for investors.
• iShares MSCI China Small-Cap ETF has struggled to keep up with other China ETFs, but may be a good short-term play.
• Quality metrics show low profitability and stable debt levels in small-cap Chinese equities, while value metrics indicate they are within the value arena but not extremely cheap.
• Geopolitics are likely to suppress the long-term performance of Chinese equities, but also provide a way to balance away from richly priced US stocks.

Small-cap Chinese stocks are a good way to play a possible upswing in cyclical value. Although these stocks tend to be of relatively low quality, they are also very cheap and have broken out of their sustained downtrend of the last two years. With a number of correlated cyclical indicators, particularly commodity prices, beginning to recover, ETFs like the iShares MSCI China Small-cap ETF ( ECNS ) have a high probability of appreciating quite rapidly over the coming year.

In the following analysis, I am going to look at key quality, value, trend, and momentum metrics for the largest holdings of ECNS to determine how the ETF as a whole should be classified, and I am going to then cross-reference those results with other macro factors.

I have taken the top 30 holdings of ECNS for which data was available, constituting around 30% of the fund's holdings, and aggregated the data to come up with an estimate of small-cap Chinese equities historical financial performance. Here, I will primarily concentrate on those which seem to have had some relevance to ECNS's performance or which help to categorize it by style metrics....

For further details see: