Moody’s Downgraded China ... But Someone Forgot to Tell Chinese Funds the “Bad News”

Moody’s Investors Service just downgraded China. But someone apparently forgot to tell Chinese funds the “bad news.” That’s because they’re some of the best performers in the entire market!

First, the news: Moody’s cut its Chinese sovereign debt rating to “A1” from “Aa3”. That means China now sports only the fifth-highest grade Moody’s bestows, putting it on par with countries like Israel, Estonia, and Saudi Arabia (compared with the likes of Aa3 members Belgium, Chile, and the Cayman Islands previously).

Moody’s blamed the “expectation that China’s financial strength will erode somewhat over the coming years” due to rising debt and other government liabilities. The smaller ratings agency Fitch Ratings had already downgraded China’s debt to its fifth-highest category of “A+” in 2013.

In years past, these kinds of credit ratings actions significantly impacted the markets. Ratings downgrades during the credit crisis caused collapses in everything from mortgage bond prices to financial stocks. But the influence wielded by Moody’s, Fitch, and Standard & Poor’s has waned more recently.

One problem is that they often change their ratings way too late and by way too little. Another problem is that they get paid by the very entities they rate. That’s unlike Weiss Ratings, which produces independent, conflict-of-interest-free risk evaluations.

Indeed, ETF and mutual fund investors don’t seem anywhere near as worried as Moody’s about Chinese risk. I recently produced an ETF Screener called “China ETFs.” It includes every ETF with the word “China” in its name, excluding 2X and 3X leveraged products. It also shows their Weiss Ratings, as well as year-to-date and 1-year total returns.

Have a look at the results (sorted in descending order by YTD performance):

Data Date: 5/24/17

You can see that the KraneShares CSI China Internet ETF (KWEB, Rated “C-”) is sporting a return of more than 43% this year alone, and almost 52% in the past 12 months. Right behind it are several other diversified China ETFs, as well as those focused on specific sub-sectors of the Chinese market, with YTD returns of more than 20%. That includes the Guggenheim China Technology ETF (CQQQ, Rated “C”) and the Global X China Consumer ETF (CHIQ, Rated “C”).

But wait, there’s more: 21 out of 30 of these ETFs are outperforming the 7.8% YTD return of the SPDR S&P 500 ETF (SPY, Rated “B”). All but one of them are up on the year, while every single one is showing a positive 1-year return.

What about mutual funds? It’s the same story. Check out the results of this “China Mutual Funds” Screener I created, using the same criteria spelled out before:

Data Date: 5/24/17

You can see that the Neuberger Berman Greater China Equity Fund Institutional Class (NCEIX, Rated “C”) is leading the charge with a return of around 25.8% so far in 2017 and 37.1% in the last 12 months. Every single one of the funds – which spread across seven pages of data – are beating the SPY. Even the worst performer is up 12.8% YTD, and 17.3% in the past year.

So what’s the message here? Don’t take the somewhat conflicted opinions of the major ratings agencies at face value when it comes to determining where to invest. Use tools like the screeners we provide (which you have access to as a member of our Weiss Platinum service), as well as the guidance our Weiss Ratings analysts offer, to achieve better results.

Oh and one last thing: Be sure to get my latest take on the markets and promising investments live and in person. I’ll be presenting multiple times at the MoneyShow San Francisco that runs from August 24-26 and the MoneyShow Toronto that runs from September 8-9. You can reserve your spot – for free – by clicking here for San Francisco or here for Toronto. See you there!

Until next time,

Mike