FXI ETF: A Contrarian Investment Opportunity (NYSEARCA:FXI)

samxmeg In an early 2024 Seeking Alpha article on the iShares China Large-Cap ETF (NYSEARCA:FXI) product, I highlighted the ugly price action in 2023 and the start of 2024. FXI was trading at the $22.20 per share level on January 16, 2024, when I concluded: I favor a small portfolio allocation in iShares China Large-Cap ETF, leaving room if the ETF challenges the critical October 2022 and October 2008 technical support levels. I view FXI as a lotto ticket for an improvement in Chinese-U.S. relations. The ugly price action over the past years creates significant value for investors with a long-term horizon and stomach for the potential for a continuation of mark-to-market losses. In June 2024, FXI had recovered 20.7% to the $26.80 per share level as the ETF outperformed the most diversified U.S. stock market index, the S&P 500 (SP500). FXI remains in a long-term bearish trend, and the ETF could offer compelling value at the current price level. Chinese stocks have suffered as investors shun the country since early 2021 The FXI has been in a bearish trend since the February 2021 high. Five-Year Chart of the FXI ETF Product (Barchart) The chart highlights the bearish trend of lower highs and lower lows in the FXI since the February 2021 $54.52 high. The FXI ETF traded at a $20.86 low in January 2024. While the short-term trend has turned bullish since the early 2024 low, the longer-term path of least resistance remains bearish. U.S. and European stocks are near record highs Over the past months, the prospects for lower interest rates have caused U.S. and European stocks to rally to record highs. The S&P 500 is the most diversified U.S. stock market index. Long-Term Chart of the U.S. S&P 500 Index (Barchart) The monthly chart highlights that the S&P 500 rose to a record 5,505.53 high in June 2024. At the 5,500 level on June 20, the leading U.S. stock market index remains near record territory. After the ECB cut rates by 25 basis points, some of the top European stock market indices rose to all-time highs: The German DAX futures reached 19,018 in May and were over 18,240 in June. The U.K. FTSE futures rose to 8,489 in May and were over 8,260 on June 20. The French CAC 40 futures reached a record 8,273.50 in March 2024 and were near 7,700 in late June. The bottom line is the leading Chinese large-cap stocks continue to lag far behind U.S. and European stocks. The top holdings of the FXI ETF are: Top Holdings of the FXI ETF Product (Seeking Alpha) As the chart shows, FXI holds over 8% of its assets under management in Alibaba Group (BABA), the most high-profile multinational Chinese company. BABA is China’s answer to U.S. Amazon (AMZN). Tencent (OTCPK:TCEHY), with over 11%, is the largest holding, a multinational technology conglomerate. The second-leading holding, Meituan (OTCPK:MPNGF), is a consumer product and retail service company. Investors are looking for value – Charlie Munger left us, but he was optimistic about China’s outlook With the leading U.S. and European stock indices near all-time highs, it has been challenging for investors to find value in the stock market. One of the leading value investors, Charlie Munger, passed away in late 2023. Before his passing, Mr. Munger, Warren Buffett’s trusted partner, said: “My position in China has been that: (1) the Chinese economy has better future prospects over the next 20 years than almost any other big economy. That’s number one. (2) The leading companies of China are stronger and better than practically any other leading companies anywhere, and they’re available at a much cheaper price. So naturally, I’m willing to have some China risk in the Munger portfolio. How much China risk? Well, that’s not a scientific subject, but I don’t mind whatever it is, 18% or something.” Mr. Munger, a long-term investor, saw tremendous value in China because of its prospects for growth and the value of its leading companies. China’s economy is bound to recover, and relations with the U.S. must improve China and India are the world’s most populous countries, and China is the second-leading economy. It may not be long before China’s GDP eclipses the United States. Two significant issues facing the Chinese economy are consumers saving more than they are spending and its problematic property sector. While some economists believe China’s economy is on a disastrous road, Dan Rosen, an active member of the Council on Foreign Relations and National Committee on U.S.-China Relations, and Nicholas Lardy, a nonresident senior fellow at the Peterson Institute for International Economics, are not bearish on China. Rosen cites recent moves to open the credit spigot to only those construction projects that could be finished quickly, which is a “step in the right direction.” Lardy believes the CCP is on the right path as it navigates the property issues. He said the response was too slow, and the remedies were “better late than never.” Economic and policy reforms in China could be on the horizon, but relations with the United States and Europe are critical for the economy’s future. While the bifurcation of the world’s nuclear powers remains a significant problem for the Chinese economy, making Chinese stocks less attractive, the future of the world depends on improving Chinese-U.S. relations. Any breakthrough that eases the current tension could make Chinese stock prices explode and catch up with the leading U.S. and European stock market indices. Therefore, Chinese large-cap stocks and the FXI ETF could have significant upside. Charlie Munger’s most considerable legacy could be his long-term bullish view of China. FXI on a scale-down basis for the long term At the $26.80 per share level, FXI had $4.72 billion in assets under management. FXI is a highly liquid ETF, trading over 29 million shares daily. The ETF charges a 0.74% management fee, but the blended $0.69 or 2.57% dividend is significantly higher than the SPDR® S&P 500 ETF Trust’s (SPY) 1.23% dividend. Long-Term Chart of the FXI ETF Product (Barchart) The long-term chart dating back to 2004 shows the bearish trend in the FXI ETF, which remains at around half the price of the early 2021 high. While the long-term trend is negative, FXI has shown some signs of bullish life, with the short-term trend being higher since the early 2024 low. As FXI has made lower highs and lower lows, technical resistance levels have declined with the ETF’s price. Technical resistance is now at the early 2023 $33.38 high. Above there, the February 2021 $54.52 level is the critical upside level. FXI’s all-time peak was in late 2007 at $73.19. I am a buyer of FXI, allocating a percentage of a long-term investment portfolio to the leading Chinese stocks. I suggest leaving room to add at lower prices, as the long-term trend remains bearish, and it is impossible to pick bottoms in any market. However, with the U.S. and European indices near record highs, Chinese stocks offer significant value if the economy improves. Charlie Munger was a successful value investor who believed in China’s long-term value proposition.

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