Koesterich Reiterates Overweight Rating on China

For the bulk of 2012, it has been troublesome economic data that has kept a lid on Chinese equities and the corresponding ETFs. However, Chinese data points, along with stocks there, have improved in recent weeks. The latest sign is the October China HSBC Flash Manufacturing Purchasing Managers Index, which registered 49.1.

That is good enough for the best reading since April and combined with rising retail sales and third-quarter GDP growth of 7.4 percent could be reason enough for more investors to become with already surging China ETFs.

Russ Koesterich, iShares global chief market strategist, advocates an Overweight rating on the world's second-largest economy. In a new blog post, Koesterich notes the most dire of scenarios many predicted for China's economy has not come to pass.

"Our expectation is that Chinese growth has probably slowed to around 7.5% 8%," he wrote. "We believe that the more dire predictions of a Chinese hard landing appear less likely and recent market selling is overdone."

With it becoming more apparent the hard landing so many had called for has been avoided, China ETFs have soared in recent weeks. In the past month, the iShares MSCI China Index Fund (NYSE:MCHI) and the Guggenheim China Small-Cap ETF (NYSE:HAO) are both up nearly 10 percent. The iShares FTSE China (HK Listed) Index Fund (NYSE:FCHI) has popped nearly nine percent. The iShares FTSE China 25 Index Fund (NYSE:FXI), the largest China ETF by assets, has been a "laggard" with a gain of just six percent.

Those ETFs and others may have more room for upside because, as Koesterich notes, Chinese equities are inexpensive on a valuation basis.

"Chinese stocks are down a stunning 66% from their 2007 top," wrote Koesterich. "Chinese equities are now trading at approximately 1.3 times book value and less than nine times next year's earnings. On a relative basis, the Chinese stock market has never looked cheaper. Historically, Chinese stocks traded at a 56% premium to other emerging market (EM) countries, but today they are trading at a 10% discount."

The compelling valuations apply to China ETFs as well. The iShares MSCI Emerging Markets Index Fund (NYSE:EEM) sports a price-to-earnings ratio of 17.3 and a price-to-book ratio of three,according to iShares data.

By comparison, FCHI trades at 12.7 times earnings and with a price-to-book ratio of 1.65. MCHI goes for 14.7 times earnings with a price-to-book ratio of 2.5. FXI is cheaper than both at 12.5 times earnings and a price-to-book ratio of 1.55.

Chinese small-caps, as measured by HAO, are even cheaper. That ETF has a price-to-earnings ratio of just 7.8 and a price-to-book ratio of one, according to Guggenheim data.

"While Chinese growth is unlikely to revert back to the glory days of 2010, when the economy expanded by over 10%, it looks like current valuations now more than reflect the slowdown in growth," said Koesterich.

Even some niche China ETFs have gotten in on the act in recent weeks. The EGShares China Infrastructure ETF (NYSE:CHXX) has surged 9.3 percent in the past month while the Global X China Consumer ETF (NYSE:CHIQ) is up 5.3 percent.

Slumping retail sales in China during the first half of 2012 punished CHIQ, sending the ETF tumbling by approximately 31 percent from early March through late July. CHIQ's current price-to-book ratio is 1.62.

Buoyed by China's infrastructure stimulus plans and a strong technical picture, CHXX has rebounded from its 52-week low set in early September. Even with that impressive bounce, CHXX trades at just 8.4 times trailing earnings with a price-to-book ratio of 1.1.

For more on China ETFs, click here.