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— as of April 30, 2019 —

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Susanne Alexandor

China Rising: Long-Term Growth Potential with Chinese Equities

Snapshot

China is the world’s second largest economy by nominal gross domestic product (GDP), and already the largest, based on Purchasing Power Parity (PPP). It is transitioning into a diverse and more sophisticated country with rising per capita GDP, while its capital markets are liberalizing. Investors should consider ZCH to participate in this long-term growth opportunity. 

Susanne Alexandor

China Rising: Long-Term Growth Potential with Chinese Equities

Snapshot
China is the world’s second largest economy by nominal gross domestic product (GDP), and already the largest, based on Purchasing Power Parity (PPP). It is transitioning into a diverse and more sophisticated country with rising per capita GDP, while its capital markets are liberalizing. Investors should consider ZCH to participate in this long-term growth opportunity.

Details
BMO China Equity Index ETF (Ticker: ZCH)

Timely Benefits After declining sharply in 2018 to a four-year low, Chinese equities have rebounded strongly in 2019. The economy has stabilized, with policy support aimed at avoiding an economic slowdown and the trade dispute with the U.S. likely to be resolved.

Trade Idea – ZCH
We believe Chinese equity investments offer an attractive long-term growth opportunity. China’s population of 1.4 billion is approximately four times that of the U.S. Despite the recent slowdown, its economy is still one of the fastest growing in the world, outpacing the U.S. rate of growth by almost 3 times. China is investing in its future, with the largest education system in the world, and more university students than the U.S. and EU combined.

Investing in China is becoming more accessible, with leading index providers increasing the inclusion of select local shares. At the same time, China is lifting restrictions to foreign buyers. As Chinese representation in global indices and accessibility expands, investor awareness and interest are expected to grow as well. While the Chinese market has rallied significantly year-to-date, its valuations remain lower than its counterparts in the developed markets. Earnings growth and double digit return on equity are expected to be sustained, given the positive outlook for the economy.

ZCH offers exposure to the expanding domestic economy by holding significant positions in some of the most dominant players in communications and internet services, while also providing diversified exposure to the economy in general. In addition, it invests exclusively in American Depository Receipts listed in the U.S., which are subject to international, as opposed to local, accounting standards. 

Outlook
China is undergoing a shift from an export-oriented to a more consumer and service-driven economy, and is expected to surpass the U.S. as the world’s largest economy, in nominal terms, in the next decade. Foreign access to the market is increasing, and while some challenges remain that could ultimately constrain growth, such as demographics and high debt levels, the opportunities should outweigh the risks. ZCH offers a solution to passively invest in the dominant companies in China. Long-term investors should be rewarded.

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Source: Andrea Willige, “The world’s top economy: the US vs China in five charts,” December 6, 2016.

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Alfred Lee

Quality Never Goes Out of Style: Easy Access to Blue-Chip Investing

Snapshot

Though equity prices rallied back in the first quarter, investors are growing more cautious about the decade-long bull market, particularly in light of the inversion of the yield curve between the 3-month to 10-year Treasury terms. Though the inversion was brief, it does signal that investors may want to be more prudent when taking risk. 

Alfred Lee

Quality Never Goes Out of Style: Easy Access to Blue-Chip Investing

Snapshot
Though equity prices rallied back in the first quarter, investors are growing more cautious about the decade-long bull market, particularly in light of the inversion of the yield curve between the 3-month to 10-year Treasury terms. Though the inversion was brief, it does signal that investors may want to be more prudent when taking risk. Quality ETFs can help mitigate these risks by providing:

  • A defensive tilt in your portfolio. High-quality assets offer upside potential, while also weathering economic downturns better than broad market.
  • Easy access to a portfolio of blue chip stocks. Given that it can be inefficient to individually own a diversified pool of assets, ZUQ, ZEQ and ZGQ provide a cost-effective means of adding blue chip companies that have long-term competitive advantages.

Details
BMO MSCI USA High Quality Index ETF (Ticker: ZUQ)
BMO MSCI Europe High Quality Hedged to CAD Index ETF (Ticker: ZEQ)
BMO MSCI All Country World High Quality Index ETF (Ticker: ZGQ)

Benefits
Cost efficiency. Broad geographic and sector diversification. Attractive valuations. Blue-chip companies.  

Trade Idea – ZUQ, ZEQ and ZGQ
After a volatile fourth quarter, markets have rallied back between January and April. However, the persistence of a 10-year bull market remains in question, supplemented by an ongoing trade war, rhetoric and concerns of a more sustained inversion in the yield curve. ETFs that focus on quality companies can mitigate these broader economic risks by investing in strong, blue-chip stocks which have historically weathered downturns better than the benchmark. 

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We define Quality stocks as having:

  1. Stable year-over-year earnings – Companies with consistent and repeatable earnings growth.
  2. High return on equity – Companies that are efficient in generating profit.
  3. Low financial leverage – Lower debt levels make companies less vulnerable, particularly during market downswings. 

Despite the recent rally, valuations are still rather compelling, despite the Federal Reserve adopting “patience” at the start of January. Even with the shot of adrenaline which created a tailwind for asset prices, picking up high-quality names at reasonable prices, may be of consideration given that Quality stocks tend to perform well across multiple stages of the economic cycle. These ETFs also serve as ideal cornerstone pieces in a portfolio, as their underlying companies have proven to be long-term consistent winners. 

Outlook
Another driver for quality assets is the recent inversion of the three-month to 10-year U.S. Treasury yield curve. Although it was temporary, all recent recessions have been preceded by an inversion of the yield curve by about 18 to 24 months. However, it is important to remember that while a recession is always preceded by a yield curve inversion, the reverse is not necessarily true – a yield curve inversion does not always guarantee a recession. Whether or not economic growth begins to sputter, quality stocks could make a good addition to a portfolio.    

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Click here to access the BMO ETF Portfolio Strategy Report for Q2 2019.