The China trade has performed well over the past year, though it hasn’t been an easy one, BTIG analysts said Tuesday.
From the lows in late January to the highs in mid-May, the iShares China Large-Cap ETF (FXI) surged 41%. It then dropped 17% through August before rallying 22% to reach new 52-week highs.
On a relative basis, FXI is up 24% year-to-date, outperforming the SPY's 20% gain. However, the higher-beta KraneShares CSI China Internet ETF (KWEB) has lagged, rising only 9.4% year-to-date.
"When we look at the big picture, we think there is still plenty of upside in this trade," the analysts commented.
In 2023, the Hang Seng index was concluding its fourth consecutive year of losses. Historically, since 1965, the index had only declined for three straight years on two occasions: 1967 and 2002.
In the five years following 1967, the Hang Seng posted returns of 62%, 44%, 36%, 61%, and 147%, while after 2002, the index gained 35%, 13%, 4%, 34%, and 39%.
Although this is a small sample size, BTIG analysts suggest that given the current sentiment and positioning, "it's not hard to imagine a decent run for China here."
The FXI has recently hit a new high for 2024 and is close to surpassing its August 2023 high. Breaking through this level would complete a significant base and confirm a long-term double bottom, which could signal upside potential toward 40, an increase of 32%.
KWEB, meanwhile, has room to rebound to its May highs of 32.60 in the short term, with its 2023 peak of 36 above that.
"It's always difficult to buy something after it has had a big move up,” analysts commented. “Often times the hardest trade is the correct trade, and we think that's the case here. A breakout worth chasing,” they concluded.