Chart of the Day – $FXI : Hot N’ Sour Soup

by Enis June 25, 2013 12:35 pm • Commentary

Here is a 5 year weekly chart of FXI:

5 year weekly chart of CMI, Courtesy of Bloomberg
5 year weekly chart of FXI, Courtesy of Bloomberg

The technical case is getting weaker by the day, though if FXI is due for a bounce, it’s around the 30 level I’ve highlighted in red.

What about the fundamental case in FXI?  It’s a difficult assessment on pure valuation vs. projected earnings growth basis since 6 of the top 10 holdings in the FXI are financial related.  As we know quite well from 2008, using price/earnings or price / book value for banking stocks is not a good measure of potential downside.  Here are the valuation levels for the top 5 non-financial names in the ETF

  • China Mobile:  9.5 P/E valuation with -2.5% earnings growth projected
  • Tencent Holdings:  30 P/E with 25% earnings growth projected
  • CNOOC:  7 P/E with -2% earnings growth projected
  • China Petroleum and Chemical:  7 P/E with 10% earnings growth projected
  • China Shenhua Energy (Coal):  7 P/E with flat earnings growth projected

So Tencent is the main name with any substantial earnings growth projected.  Chinese internet stocks are the one area of the market that I view as the Oasis in the Desert.  The rest of the stocks are cheap valuations, but have been value traps.

The real problem, though, is the financial system.  I discussed some long-term reasons for the market’s concerns about China in this morning’s Macro Wrap.  As we have unfortunately seen on numerous occasions in the past decade in the U.S. and Europe, the financial system rests on confidence.  Confidence is a fragile thing.  And the market’s confidence in Chinese markets are waning.