Emerging Markets ETF (EEM) Rallying Along with China Stocks

Joel Anderson  |

Emerging market stocks were on the rebound, bouncing after a lengthy decline dating back to October of last year. The iShares MSCI Emerging Markets Index ETF (EEM) opened up and quickly climbed into a gain of more than 2 percent, doing so on heavy volume.

Driving gains was a solid day for Chinese equities as the financial sector made big gains on an endorsement from JP Morgan (JPM) analysts. The gain could also be a bounce back for emerging market securities, which experienced a steep sell-off since peaking in late October.

Major Chinese equities ETFs were on the rise Tuesday, with the iShares FTSE China 25 Index (FXI) gaining over 3.5 percent and the iShares MSCI China Index Fund (MCHI) up almost 3 percent. Financials pushed this upswing, potentially as a result of value-shoppers seeing a bargain.

“The rally is led by financials today because they are very cheap now,” said Hongyuan Securities Co. analyst Tang Yonggang.

One potential reason for the spike, which gave some bounce to previously moribound market, was a particularly bullish statement from JP Morgan analysts recommending a buy on Chinese stocks.

“We recommend a trading buy of China equities, based on seasonality and all-time low valuations,” strategist Michael Yu wrote in a report on Monday. “We expect a 15 to 20 percent market rebound in the coming weeks, once growth stabilizes due to seasonality and the market’s focus switches to structural reforms.”

Chinese equities are currently in a rally that comes after a steep sell-off in 2013 on the heels of concerns about contracting manufacturing and a potential credit crisis.

The Shanghai Shenzen CSI 300 Index climbed over 650 points from a low in late November of 2012 to peak at 2,775.84 on Feb. 6 of last year, a gain of more than 30 percent. This was followed by a volatile 12-month period that most recently saw a more-than 10 percent decline from December 3 to January 17. Since mid-January, though, things appear to have started to recover, climbing 5.5 percent in recent weeks.

“The market has stabilized,” said Tebon Securities Co. analyst Zhang Haidong to Bloomberg by phone. “February is also the season where company report earnings and investors are placing their bets on companies that are expected to do well. Investors have gotten more positive.”

While climbing China stocks were clearly the primary factor driving the day’s gain, a correction from the steep sell-off in emerging market stocks over the last few months may also be a factor. Since reaching $43.66 a share on Oct. 22, shares plummeted to a low of $37.11 apiece on Feb. 6, a drop of more than 35 percent.

However, since reaching that low, emerging market stocks have rebounded, potentially driven by value buyers playing against the downtrend. Since last Thursday, shares have climbed over 5 percent.

"When there are these sentiment swings, the markets do throw up opportunities for those who look," said BNP Paribas Investment Partners’ head of European equities Andrew King.




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