PGJ: Downgrading To Hold (NASDAQ:PGJ)

Back in January, I shared my bullish view on The Invesco Golden Dragon China ETF (NASDAQ:NASDAQ:PGJ). So far, the bet on China pays off, slightly outperforming S&P500. However, the market rally in Chinese equities has stalled for more than a month. It’s time to discuss again what happened and whether we should expect the next leg of the rally in Chinese stocks.

The recent economic data in China shows an uneven dynamic of key indicators, which shouldn’t be perceived as a dealbreaker, at least for now, in my opinion. At the same time, proper timing of investing in China remains one of the most important aspects for maximizing returns.

In this regard, I downgrade my rating for the PGJ ETF to Hold and get slightly more cautious on the economic outlook for China.

PGJ ETF Performance Recap

For reference, the Invesco Golden Dragon China ETF seeks to track the investment results of the NASDAQ Golden Dragon China Index. The fund invests at least 90% of its total assets in the securities that comprise the aforementioned index. Unlike peer funds like KWEB and FXI, the PGJ ETF is more skewed towards Chinese tech companies in its holdings structure.

Since my last article on the PGJ ETF in late January, PGJ returned +8.96% compared to S&P500’s +6.26%, slightly outperforming the American index.

Compared to a broad group of China-related ETFs, the PGJ demonstrated relatively strong performance over the last few months.

My bullish call in late January was on time when Chinese stocks hit the local bottom. Nonetheless, the scale of recovery is not even remotely close to what we’ve seen from late 2022 to early 2023 when Chinese equities skyrocketed by 20-50% in a matter of weeks.

The problem is that the current economic data still don’t provide enough support for the Chinese stock market, despite all the government interventions I mentioned in my article about another China ETF, the CQQQ.

China’s Exports Are Underwhelming Again

China’s March exports contracted sharply while imports shrank, missing forecasts by a significant margin. Exports from China fell by 7.5% year-on-year, way below expectations, reflecting challenges in maintaining sales. Import decline of 1.9% can be considered a signal of weak domestic demand and a slowdown in economic recovery.

For context, amid the still ongoing real estate crisis, the Chinese authorities resorted to a straightforward way to boost economic output: ramping up exports of cheap Chinese goods. Even though this was one of the pillars of Chinese growth back in the 2000s, the geopolitical landscape has become substantially more complicated since then.

The last two US administrations have imposed more restrictions on Chinese companies than ever before in the modern history of trade, marking a radically less favorable environment for Chinese exports.

Another persistent issue for Chinese companies is falling export prices. In just two years, some categories of Chinese exports faced a decline in prices from -5% to -15%.

While it’s somewhat beneficial for consumers outside China to get Chinese goods for a lower price, it also leads to the deterioration of margins for Chinese exporters.

The Bottom Line: Time To Hold

At this point, the Chinese stock market has one of the last few chances remaining to demonstrate further growth. As the US presidential elections approach, geopolitical and trade tensions between the US and China will likely keep rising, negatively affecting investors’ sentiment toward Chinese companies. Regardless of who will sit in the White House after the elections, any US presidential candidate will likely take an even tougher approach towards China.

Thus, if we don’t see any noticeable improvement in China’s economic data in the next quarter or two, an even deeper sell-off for Chinese stocks will look inevitable. For now, the Chinese authorities avoid “firing” a big stimulus “bazooka” to lay the ground for more sustainable growth.

However, with the current trends in the Chinese economy, pretty soon the Chinese government may face an unpleasant choice between “firing bazookas” (beneficial for stocks in the short-term due to an influx of liquidity) and dealing with a profound meltdown not only in the real estate sector but also across a variety of export-oriented industries.

As the window for more near-term upside in Chinese stocks is narrowing, I’d recommend a gradual trimming of positions in Chinese companies and hitting a pause on purchases until the sky in the Chinese economy clears.