Title: Friday POW! — Pick of the Week: Reiterating a Buy (FXI) Show: Haymaker (Substack) — written post, paid Author: David Hay / The Haymaker Team Date: 2026-07-17 URL: https://haymaker.substack.com/p/friday-pow-7bc Note: Written post — no timestamps. Verbatim body captured via logged-in session; standard Haymaker legal disclosure block omitted. Tracked portfolio tables now appear in Monday Portfolio Update editions (per the post's closing reminder).
Hello, Haymakers:
There seems to be a prevailing sentiment among investors that buying stocks these days is like a baseball player's batting average, and that one must take a swing on something every time the market opens. It's definitely important to be diversified, but constant diversification also has diminishing value. As Joel Greenblatt once wrote, "...don't screw up a perfectly good stock market strategy by over-diversifying your way into mediocre returns."
With that sentiment in mind, we decided to reiterate a buy recommendation we made earlier this year.
TL;DR Summary:
- FXI at ~$34; original entry $38.42 on February 25, 2026; current drawdown ~11.5%; 52-week range $31.19–$42.00 - 50 holdings; FTSE China 50 Index; cap-weighted; P/E ~10.78x; dividend yield ~2.03%; AUM $5.37B; expense ratio 0.73% - Alibaba Cloud Intelligence revenue $1.3B quarterly, triple-digit growth; Tencent net profit +21% YoY through AI integration; Baidu AI revenue 52% of total - China daily AI token usage: 140 trillion in March 2026 vs. 100 billion at start of 2024 — fastest AI deployment ramp of any major economy - Integrated circuit output +25.4% YoY through May 2026; AI-related exports 20.3% of total Chinese exports, growing 34.8% YoY - Goldman Sachs 2026 GDP forecast 4.8%; Citi 4.7% with H2 improvement; AI-related manufacturing primary growth driver - Beijing providing 50% energy subsidy for data centers; Xi-Jack Ma meeting February 2025 definitively ended tech crackdown era - Citi H2 outlook: Q2 2026 the likely low point; conditions expected to improve in second half as fiscal deployment accelerates - Net outflows ~$895M over past 12 months — light positioning; sentiment-driven selling has created current attractive entry - Risks: tariff escalation, VIE structure, consumer spending weakness (retail sales -0.6% May 2026), property sector overhang
We recommended FXI on February 25, 2026, and the ETF has eased about 11.5% since then, trading today at approximately $34 against our roughly similar entry point. Obviously, not exactly the type of price action we were hoping for. That said, we're going to explain precisely why the thesis that drove our original recommendation is not only intact, but is more compelling at current prices. And, why the forces that have kept FXI range-bound (tariff uncertainty, consumer spending weakness, and Hormuz-driven risk-off rotation) are the same forces that are creating what we believe is the most attractive entry point in the position since we first recommended it.
A Quick Refresher...
The iShares China Large-Cap ETF tracks the FTSE China 50 Index with the 50 largest Chinese companies listed in Hong Kong, spanning financial services (35.2%), consumer cyclicals (25.3%), communication services (17.8%), technology (5.9%), and energy (4.8%). One aspect you may quickly note is the low technology weighting versus the U.S. It is the most liquid and most widely held vehicle for offshore China equity exposure, with $5.37 billion in AUM, a 0.73% expense ratio, a trailing P/E of approximately 10.78x, and a dividend yield of roughly 2%.
The 52-week range of $31.19 to $42.00 tells the story of the year concisely: the ETF touched $42 in October 2025 on the initial wave of China AI enthusiasm following the DeepSeek moment. Then, it gave back the entire gain as tariff escalation and consumer spending data disappointed, and now sits near the low end of that range at $34 (~25% below the October high) at a moment when the underlying businesses in the portfolio are generating stronger earnings than at any point during the 2025 re-rating. We continue to buy.
Why We Were Wrong About the Timing
Our February buy recommendation rested on four pillars: Beijing's December 2025 policy pivot to moderately loose monetary policy (the first since 2010) signaling the most aggressive stimulus posture in 15 years; the DeepSeek moment demonstrating Chinese AI competitiveness at the frontier; regulatory normalization following the Xi-Jack Ma meeting that ended the tech crackdown; and a valuation of 10x to 11x earnings on businesses with improving earnings trajectories.
Those four pillars remain intact.
What we underestimated was the force and duration of the headwinds that intervened. The strongest was likely Beijing's goal of slowing the economy after the Strait of Hormuz was essentially closed. The idea behind that was to reduce oil consumption and imports. This succeeded to a surprising degree and is a key reason, perhaps THE reason, oil prices have retreated to not far above pre-war levels.
U.S. tariff escalation drove the average effective tariff rate from 2.2% to approximately 17% through April 2025, triggering risk-off rotation away from China equities that overwhelmed the fundamental improvement in the underlying businesses. The Hormuz closure compounded this, pushing oil above $100 and reducing risk appetite globally at precisely the moment FXI needed institutional buyers to recognize the earnings trajectory.
Consumer spending data has also been weaker than our February thesis assumed. China retail sales declined 0.6% in May 2026, the first contraction since December 2022, as property weakness and youth unemployment weighed on household spending. Citi has described the Chinese economy as K-shaped, where AI and manufacturing are booming and traditional consumption is lagging. The consumer cyclical portion of the FXI portfolio (or 25% of weight) has taken the brunt of this slowdown. Basically, we were right about the policy pivot and the technology acceleration but early and wrong on the consumer recovery timeline, and we own that.
What Has Strengthened the Thesis Since February
The AI adoption data that has accumulated since February is the most important development and maybe the most consequential for the portfolio companies. China's daily AI token usage surged from 100 billion at the start of 2024 to 140 trillion in March 2026. This marks a staggering 1,400-fold increase in approximately 26 months that is the fastest deployment ramp of any major economy by a wide margin.
The companies translating this surge in usage into reported earnings are the core of the FXI portfolio. Alibaba's Cloud Intelligence Group posted $1.3 billion in quarterly revenue with triple-digit growth. Tencent grew net profit 21% through AI integration across social, gaming, and enterprise platforms. Baidu's AI revenue now comprises 52% of its total business. These are scale numbers from the dominant platforms in a 1.4 billion person economy at the beginning of an AI deployment cycle, not the end of one.
Beijing's commitment to supporting the sector has also intensified. The government is providing a 50% energy subsidy for data-center operators, directly reducing the marginal cost of AI compute for FXI's underlying holdings. Citi's second-half 2026 outlook, published two weeks ago, raises the 2026 export growth forecast to 13% year-over-year, notes AI-related products grew 34.8% in the first five months of 2026, and identifies Q2 2026 as the likely low point of the year before H2 improvement as fiscal deployment accelerates. The J.P. Morgan Private Bank's base multiple for offshore Chinese equities remains approximately 12.5x, implying 16% upside from current prices at unchanged earnings, before accounting for earnings growth. At $34.00 versus a $38.42 entry, we are buying the same thesis at what we think is a better price on better fundamental evidence.
The Valuation and the Positioning
FXI at 10.78x trailing earnings is cheaper today than it was at our February entry, on a portfolio of businesses that are collectively reporting stronger earnings than at any point in 2025. The multiple compression since February has been driven entirely by macro sentiment (tariff fear and risk-off rotation) rather than by any deterioration in the earnings of Alibaba, Tencent, Meituan, or the financial names that anchor the portfolio. China is the cheapest major stock market in the world. This is ironic given the terror its industrial might and prodigious export machine strikes in the heart of most Western countries.
When macro sentiment reverses, as it has historically done when global investors are as underweight China as they are now, the re-rating tends to be fast. Net outflows of $895 million over the past 12 months reflect institutional investors reducing China exposure on the headlines rather than on the earnings data. That is the setup from which contrarian positions generate returns, similar to the set-up with oil and energy stocks at the end of June, just prior to their snappy rally this month.
Technical Profile
Famously — if not infamously — the Chinese stock market has been a nothing burger (or maybe nothing dim sum) for almost 20 years. This is despite the extraordinary economic progress it has made over that timeframe. It has also dramatically moved up the value chain with its exports, now shipping a million-plus new cars overseas in the most recent month. That said, there is simply no rationalizing the fact that its stock market has performed abysmally. It lacks a single company with a trillion-dollar market cap while South Korea has two, Taiwan has one, and the U.S. boasts 10.
[Chart: FXI five-year price chart with overhead resistance line — Bloomberg]
Yet, the technical profile is encouraging.
FXI broke above four-year resistance in 2025. As you can see above, it didn't have much of a follow-through after that, but the correction has been a controlled one. This is not uncommon when a security is attempting to break out of a lengthy trading range. Per the following chart, this has been one heck of a long trading range. Historically, once those are penetrated to the upside, significant outperformance ensues. Clearly, though, it has a long way to go to achieve that type of upside range expansion — approximately 30%. An all-time high is even further away. Still, we believe over the next few years it will take out both the $45 long-term resistance, where it has topped out multiple times, and, eventually, achieve a new all-time-high north of $60.
[Chart: FXI since 2005 — Bloomberg]
Arguing the Other Side
The bear case is not exactly an afterthought, though. U.S.-China trade relations could deteriorate further from here, and additional tariff escalation would pressure the export-oriented components of the portfolio and extend the risk-off sentiment that has driven the drawdown. The VIE structure (foreign holders own Cayman Islands entities with contractual rights to earnings rather than direct equity stakes) has never been stress-tested in a severe geopolitical crisis, and that legal uncertainty justifies a permanent discount that no earnings improvement can fully offset.
Consumer spending weakness is the freshest concern: the May retail sales contraction is real data, not noise, and if Beijing does not deploy broader demand-side stimulus in the second half, the consumer recovery likely extends further into 2027. We think position sizing is important here and should reflect the binary elements of the geopolitical and trade risk. This is not a name to hold at a size that would be uncomfortable if the drawdown extended to 25%.
The Bottom Line
The headwinds that created the drawdown for FXI are real, but they are also macro- and sentiment-driven, not fundamental problems. Citi sees Q2 as the cyclical low. In our view, positioning is light and the earnings results are accumulating in our favor. We are not abandoning a thesis that the data continues to support because five months of price action have tested patience. We are reiterating a buy at $34 with a 12- to 18-month target of $42 to $48, representing a re-rating to 12x to 13x earnings on a portfolio whose earnings trajectory has not deteriorated since February. Importantly, unlike with the U.S., there are zero concerns China's stock market is caught up in a bubble. The original call was right about the "what" but early about the "when".
We are staying in.
The Haymaker Team
Reminder: The tracked tables now appear in our Monday Portfolio Update editions.