KraneShares' Brendan Ahern: Is China Investable? | #535

Episode Summary

Executive Summary: Brendan Hearn argues that China is cheap, hated, and improving—making it attractive for long-term allocators despite persistent geopolitical worries. He says market weakness has been driven by factor and sentiment unwind, while earnings, buybacks, cash balances, and policy support are improving. He also stresses that U.S.-China economic interdependence makes true decoupling unlikely.

Main Topics: China’s market underperformance vs. fundamentals (Priority: 5/5): Hearn frames China’s weak performance as part of a broader non-U.S. equity underperformance driven by factor exposure, not just politics or regime concerns. Real estate and domestic consumption (Priority: 5/5): He identifies property weakness as a real economic drag because falling prices reduce household confidence and hit construction-related activity, but he says policy support is increasing. Geopolitics, Taiwan, and U.S.-China interdependence (Priority: 5/5): The conversation examines how investors perceive Taiwan risk, why the media narrative is often more negative than local sentiment, and why both economies remain deeply intertwined. Buybacks, cash flow, and shareholder returns (Priority: 4/5): Hearn highlights rising buybacks and large cash balances among Chinese internet firms, arguing that owner-operators are increasingly supporting valuations. China’s regional trade reorientation (Priority: 4/5): He argues China is becoming less dependent on the U.S. consumer and more integrated with Southeast Asia, the Middle East, and broader Asian supply chains. ETF structure and Crane Shares products (Priority: 3/5): He explains KWeb’s design as a bottom-up, growth-focused China ETF and mentions related strategies like KEMQ and KHYB that give different exposures to Asia/China.

Key Arguments: China’s underperformance should be analyzed through factor exposure; many non-U.S. markets were concentrated in value sectors that lagged, while China tech actually performed strongly but was too small in benchmarks to matter. The Chinese economy on the ground can look normal even when markets are weak; crowded streets and malls do not match the bearish market narrative. Real estate is a genuine headwind, not because China will have a Lehman-style collapse, but because falling home prices hurt consumption and the broader real economy. The Chinese government is actively supporting markets and real estate, including indirect ETF buying and policy nudges, which may help stabilize sentiment. Geopolitical risk is real, but true decoupling is unlikely because China and the U.S. are economically dependent on each other through trade, multinationals, and commodities. Investors should consider China as part of a diversified allocation because it is cheap, hated, and potentially starting an uptrend, with support from earnings beats, buybacks, and cash-rich balance sheets. China’s export model is changing; Chinese firms are diversifying manufacturing into Vietnam, Malaysia, and Indonesia, while China also sells more into Asia and the Middle East. Many U.S. companies are effectively exposed to China revenue, so avoiding China outright may still leave an investor indirectly exposed through U.S. multinationals. The investment case for China is partly behavioral: after years of pain, investors have capitulated, which can set up a rebound once fundamentals and sentiment begin to turn. Currency hedging is less compelling because Chinese rates are low and the RMB’s volatility is lower than many expect; deliberate depreciation would hurt domestic confidence.

Data Points: S&P 500 since March 2009 low: up over 950% - Used to contrast U.S. equity performance with non-U.S. markets since the global financial crisis. MSCI China since March 2009 low: up 161% - Cited as an example of China’s long-term underperformance relative to the U.S. All-country world ex-U.S. equities since March 2009 low: not even up one-third - Illustrates broad non-U.S. market weakness over the period. Emerging markets since March 2009 low: not even up 250% - Shows EM lag versus U.S. equities despite faster GDP growth. Chile since March 2009 low: up 68% - Used to show that even economically stable foreign markets have lagged badly. EM tech performance over 15 years: beats the S&P 500 - But it represented only about 10% of the EM benchmark, limiting index impact. China tech performance over 15 years: up over 1800% - Strong absolute growth, but it was only about 2% of the benchmark. Q1 China GDP growth: 5.2% - Hearn cites this as evidence that actual growth was stronger than economists expected. Bloomberg economist estimates exceeding actual Q1 GDP: 0 of 21 economists matched 5.2% - Used to show persistent pessimism toward China. Chinese mainland and Hong Kong market rebound: outperforming S&P and Nasdaq 100 by 20-30% - Hearn says several Crane Shares ETFs have rebounded strongly after the January liquidation. Chinese investment into Hong Kong stocks year-to-date: almost $32 billion - Evidence of domestic capitulation reversing and local buying returning. Chinese investment into Hong Kong stocks last year: $40 billion - Year-to-date flows are already approaching full-year prior levels. Alibaba share repurchases: about 5% of shares outstanding in one year - Example of aggressive buybacks among Chinese internet firms. China 10-year Treasury yield: about 2.37% - Used to argue that hedging RMB exposure is relatively inexpensive, though the firm doesn’t hedge. U.S. dollar vs. currencies over 10 years: up 40% - Supports the claim that the dollar has been a strong headwind for non-U.S. investors. U.S. multinationals’ revenue exposure to China: almost $300 billion - Hearn says this revenue would not show up as a U.S. export in trade data. China-U.S. trade numbers cited in the discussion: U.S. imports about $500B from China vs. exports about $150-180B - Used to explain the apparent trade deficit and why Chinese officials view it differently. KWeb launch timing relative to Alibaba IPO: listed 13 months before Alibaba went public - Shows the ETF was designed to capture China internet growth early. Asia high-yield bond fund yield: about 3x U.S. high-yield - Used to highlight KHYB’s income advantage after Chinese property bonds were removed from the index.

Pivotal Quotes: "China, for better or worse, is always the poster child for emerging markets." — Brendan Hearn: On why China dominates perceptions of EM even when broader index composition and performance tell a more nuanced story. "The Chinese don’t think they have a trade deficit with the U.S." — Brendan Hearn: Explaining how U.S. multinationals manufacturing and selling inside China changes the economic picture from Beijing’s perspective. "cheap, hated, and starting an uptrend" — Meb Faber: Meb’s investing framework, which he says China currently fits.

Implications: The episode suggests China may be investable for contrarian, patient capital despite headline risk. Diversified global investors should watch earnings, buybacks, policy support, and regional trade shifts rather than rely solely on geopolitical narratives.