Chinese stock markets are witnessing a dramatic surge following China’s unveiling of a new stimulus package, hinting at potential fireworks for the China-focused Franklin FTSE China ETF (FLCH).
Earlier this year, optimism shone on FLCH, and the ETF has not disappointed so far. The stage appears set for further gains, driven by China’s latest stimulus package, attractive valuations of its holdings, diversification, and low fees.
Exploring FLCH’s Strategic Approach
Franklin Templeton describes FLCH as an avenue that “provides access to the Chinese stock market, enabling investors to gain exposure to China affordably.”
FLCH functions as an index fund, betting on large-cap and mid-cap Chinese stocks.
The Phenomenon Behind the Soaring Chinese Stocks
This week, China’s central bank roared to life with an exceptional economic stimulus, its most substantial since the COVID pandemic hit. The move involved slashing the benchmark interest rate by 0.2%, reducing the reserve hold threshold for Chinese banks, and infusing financial institutions with cash to bolster their Chinese equities purchase power.
Though opinions vary on the adequacy of these measures, they are anticipated to uplift China’s economy and propel Chinese stocks. A few months back, our fellow writer Sheryl Sheth highlighted a range of top-rated Chinese stocks.
An In-Depth Look at FLCH’s Portfolio
FLCH stands out for its robust diversification, holding a portfolio of 952 stocks where the top 10 holdings make up a modest 44.9% of the assets. Detailed insights into FLCH’s top 10 holdings can be explored using TipRanks’ holdings tool.
However, there is a noteworthy concentration in FLCH’s top holding, Tencent (TCEHY), with a hefty weighting of 15.3% owing to Tencent’s colossal size.
Besides Tencent, the fund’s top holdings encompass prominent Chinese internet and e-commerce giants well-known to U.S. investors like Alibaba (BABA), PDD Holdings (PDD), and JD.com (JD). Sector-wise, the fund showcases diversity with consumer discretionary, communications services, and financials having significant weights.
The Momentum Continues in the Rally
My optimism about FLCH and its holdings sustaining their growth trajectory post the recent rally stems from their compellingly low valuations. Chinese stocks have braved various storms over the years, yet FLCH’s portfolio trades at a mere 11.7x trailing 12-month earnings, less than half the valuation of U.S. stocks such as the S&P 500, which trades substantially higher at 27x trailing earnings.
A comparison between FLCH’s top holdings and their U.S. counterparts underlines this valuation gap vividly. While the regulatory environment differs for Chinese tech giants compared to U.S. peers, the valuation metrics paint a stark picture.
For instance, Tencent trades at a mere 15.9x consensus December 2024 earnings estimates, and Alibaba offers an even cheaper 11x March 2025 earnings estimates post its recent upsurge. In contrast, Amazon and Microsoft significantly outprice them in terms of valuation metrics.
Exceptional Smart Scores Enhancing the Outlook
A striking commonality among FLCH’s top 10 holdings is their impeccable Smart Scores. The Smart Score, a TipRanks innovation, rates stocks on a scale of one to 10 based on eight crucial market factors, with scores of eight or higher akin to an ‘Outperform’ rating.
An astonishing nine out of FLCH’s top 10 holdings boast ‘Outperform’-equivalent Smart Scores of eight or above, with six achieving a perfect 10 Smart Score. Be sure to explore TipRanks’ list of other top Smart Score stocks for further insights.
Additionally, FLCH itself secures an ‘Outperform’-equivalent ETF Smart Score of eight.