China Internet ETF Is A 2017 Rebound Story

Plenty of emerging markets have come under pressure since Donald Trump won the U.S. presidential election on November 8. That includes China, which is not surprising because China is the largest emerging economy and Trump has not shied away from rhetoric that implies his administration will not take it easy on the world's second-largest economy when it comes to trade.

So, it is not surprising that China exchange-traded funds listed in New York are scuffling. Over the past week, the largest U.S.-listed China ETF is lower by almost 5 percent. Perhaps unjustly, the KraneShares Trust (NASDAQ:KWEB) is also being punished, arguably to the point that the benchmark China internet ETF is now oversold.

KWEB's 2016 Struggles

KWEB's struggles to end 2016 could position the ETF as an ideal rebound candidate for 2017. It appears some analysts concur, at least when it comes to some of the ETF's marquee holdings.

Multiple KWEB Holdings Initiated/Reiterated At Buy

In new research, Evercore ISI initiated coverage of Tencent Holdings Ltd. (OTC:TCEHY) with a Buy rating and Baidu Inc (ADR) (NASDAQ:BIDU) at Hold. Tencent, China's largest internet company, and Baidu, the country's largest internet search provider, are KWEB's largest and third-largest holdings, respectively, combining for over 20 percent of the ETF's weight, according to KraneShares data.

Evercore also reiterated a Buy rating on Alibaba Group Holding Ltd (NYSE:BABA), the Chinese e-commerce giant that is KWEB's second-largest holding.

As China sees higher mobile penetration, it is clear that the pace of technology innovation is increasing across major industries, such as retail, media, advertising, payments, and more. Thus, as we think about the biggest beneficiaries of this technology-induced change, we see the big three: Baidu, Alibaba, and Tencent (BAT) in an unprecedented position to lead, according to an Evercore note posted in Barron's.

Fundamentals For KWEB

Fundamentals continue boding well for the long-term KWEB bull thesis. For example, China has 22 percent of the world's internet users, according to KraneShares data. That is more than double the amount found in the US and at the end of last year, China's e-commerce market was worth $590 billion, making the $324 billion U.S. e-commerce market seem paltry by comparison.

Here's what Evercore ISI said in the note posted by Barron's on Tencent, 11.7 percent of KWEB's weight: Combined with its increasing success on payments, particularly mobile, we expect higher overall monetization for the platform and growing investor interest. Despite Chinas GDP-per-capita being $8,000, or ~14 percent of that in the United States, the China gaming market is 13 percent larger than in the US (at $26.6 billion vs. $23.5 billion in the United States). One major reason is that China gamers spend 8 hours per week gaming and a much higher portion of their disposable income.