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Chinese ADRs: Index Inclusion A Key Catalyst

MSCI will include Chinese ADRs into its indices, a key positive to US-listed Chinese shares. Tech will be the biggest beneficiary with BABA, BIDU and CTRP being the three largest. Short-term trading idea: Long BABA and BIDU. Long-term fundamentals continue to favor BABA over BIDU. MSCI announced the details involving the inclusion of Chinese ADRs to its indices. This is significant in that it marks the first time the ADRs are being included in MSCI indices. Overall, 14 Chinese ADRs will be included through two rounds, with the first starting on November 30th and the second starting on June 1st of 2016. This inclusion is significant in several ways: First, the inclusion into the MSCI indices allows these ADRs to be noticed by large fund managers who can only invest in a particular index, thereby allowing them to benefit from the positive fund flows. Second, the inclusion could potentially pave the way for Chinese domestic A-shares to be included in the index. Large cap Chinese ADRs are the biggest beneficiaries of this decision, so companies such as Alibaba (NYSE: BABA ), Baidu (NASDAQ: BIDU ) and Ctrip (NASDAQ: CTRP ) could see further fund flows into these stocks. Among the three largest ADRs to be included in the indices, I am positive on BABA given its attractive near- to medium-term outlook (see – Alibaba: The Best Remains The Best ) and CTRP given its industry consolidation ( Baidu And Ctrip: Tie-Up On O2O ). I am least positive on BIDU given its weaker position in the fast growing mobile payment and O2O space relative to its rivals ( Baidu: Flying Against The Bears ). Looking at the companies to be included in the MSCI China Index, it is clear that internet is the biggest beneficiary, accounting for 30% of the index. This is the first time in which a private enterprise such as BABA, rather than a state-owned enterprise (SOE), is the largest company. This also shows the transformation of the Chinese economy where private enterprises are becoming increasingly important. On the other hand, the weight of SOEs will drop to 55% from 68%, a record low. Finally, China will account for 28% of the emerging market benchmark, an improvement from 24%. Alibaba is perhaps the biggest beneficiary of this decision, accounting for 40% of the inclusion, followed by BIDU that accounts for 27%. Ctrip, NetEase (NASDAQ: NTES ) and JD.com (NASDAQ: JD ) will account for 5-7% each, but BABA will remain the most relevant with 8% of the MSCI China Index, followed by BIDU at 5%. Together, they will take the 4th and the 8th spots in the MSCI Emerging Market Index. After this inclusion, funds tracking the MSCI Emerging Market Index will be the primary fund flows that drive these ADRs. For BABA, this represents roughly 25 days of its average daily volume, whereas it is 35 days for BIDU. For New Oriental (NYSE: EDU ), it is around 92 days of its trading volume, while TAL Education (NYSE: XRS ) and NetEase could see somewhere around 50 days. Conclusion, the inclusion of Chinese ADRs in the MSCI indices is a positive to most ADRs, particularly the large caps. For my short-term trading idea, I would overweight BABA and BIDU. However, long-term fundamentals continue to favor BABA over BIDU.

Aerospace And Defense ETFs Flying High On Strong Earnings

The U.S. bourses saw the majority of Q3 earnings releases getting over last week with headwinds from Q2 still at play. A combination of Energy sector weakness, dollar strength and global growth uncertainties weighed on the results. 341 S&P 500 members, accounting for 75.5% of the index’s total market capitalization, have so far reported results. Total earnings for these companies are down 1% on 4.9% lower revenues, with 71.3% beating earnings estimates and 42.7% coming in ahead of revenue estimates. Companies struggled to beat lowered top-line expectations, with the ratio of companies beating revenue estimates being the lowest in the recent past. However, instead of ‘extremely weak’, the Q3 earnings picture is shaping up to be about in line with the preceding quarter, which was by itself a weak reporting season. Despite the headwinds, aerospace & defense, a relatively smaller sector within the S&P 500, held up well this past quarter. They have not only reported better-than-expected results but also lifted their views in the past two weeks. The earnings beat ratio of the entire aerospace and defense companies unfolding their Q3 results is a stellar 77.8%. The U.S. defense sector performed well given the elevated geopolitical risk, a recovering U.S. economy and strong commercial sales. Escalating geo-political tensions in Eastern Europe, the Middle East, North Korea and Syria boosted demand for defense products. Further, nations such as India, Japan and South Korea are raising their budgets in order to make their defense platforms up to date. Below we have highlighted in greater detail the earnings of some of the major aerospace and defense companies which really drive this sector’s outlook. Quarterly Earnings in Focus The Pentagon’s prime contractor, Lockheed Martin Corp. (NYSE: LMT ), opened this earnings season with robust third-quarter profits. It reported better-than-expected earnings along with higher revenues, solid margins, and strong cash flows, buoyed by robust sales of its F-35 Joint Strike Fighter. The solid quarterly results have enabled it to lift its 2015 guidance for sales, operating profit, and EPS. Aerospace giant, The Boeing Company (NYSE: BA ), delivered third-quarter 2015 adjusted earnings of $2.52 per share, confidently beating the Zacks Consensus Estimate by 13.5%. Earnings also increased 18% year over year on the back of strong operational performance. Revenues came in at $25.85 billion for the quarter, exceeding the Zacks Consensus Estimate by 4.5% and improving 9% from the year-ago level on solid commercial aircraft deliveries. Boeing raised its full-year earnings outlook to the range of $7.95-8.15 per share from the prior guidance of $7.70-7.90 per share. The company also lifted its revenue guidance for the year to the range of $95-97 billion from $94.5-96.5 billion expected earlier driven by increased commercial delivery outlook. Just after winning a multibillion-dollar contract to build a new U.S. bomber, Northrop Grumman Corp. (NYSE: NOC ) reported solid third-quarter 2015 results with revenue and earnings beating the Zacks Consensus Estimate by 6% and 2.4%, respectively. The maker of the current B-2 bomber and Global Hawk unmanned planes has also increased its profit outlook for the full year. General Dynamics Corp.’s (NYSE: GD ) third-quarter earnings from continuing operations of $2.28 per share topped the Zacks Consensus Estimate by 8.6% and also increased 11.2% from the year-ago period on the back of higher defense orders and solid demand for its Gulfstream airplanes. Revenues of $7.99 billion surpassed the Zacks Consensus Estimate by 3.1%. The company raised its 2015 profit outlook based on Q3 results, higher deliveries of Gulfstream business jets and surging sales at the submarine-building unit. Earnings are expected to be between $8.90 and $9.00 per share for 2015, up from $8.70 to $8.80 projected earlier. United Technologies Corporation (NYSE: UTX ) reported third-quarter adjusted earnings of $1.67 per share, down 2% year over year. However, the figure surpassed the Zacks Consensus Estimate of $1.54. Total revenue decreased 6.0% year over year to $13,788 million owing to the impact of adverse foreign exchange and a decline in organic sales. Revenues also missed the Zacks Consensus Estimate of $14,593 million. The company reaffirmed its 2015 guidance. ETFs to Play All these major aerospace and defense companies and their ETFs have been experiencing a surge in share prices, since their solid third-quarter earnings results and improved outlook. For investors who want to play the sector in order to capture the impressive trend, there are a few aerospace and defense ETFs available. Below, we have highlighted some of the key points regarding them. iShares U.S. Aerospace & Defense ETF (NYSEARCA: ITA ) The fund, tracking the Dow Jones U.S. Select Aerospace & Defense Index, holds 39 securities in its basket with Boeing, United Technologies, Lockheed Martin, General Dynamics and Northrop Grumman being the top five stocks. All of them account for more than one-third of the fund assets. With an asset base of nearly $523 million, ITA is the largest player in this space. The fund trades in moderate volumes of roughly 42,000 shares a day and charges an annual fee of 43 bps per year. The fund was up 4.9% in the last two weeks and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. PowerShares Aerospace & Defense Portfolio (NYSEARCA: PPA ) PPA follows the SPADE Defense Index, with 53 companies involved in the development, manufacturing, operations and support of U.S. defense, homeland security and aerospace operations. Lockheed Martin, Boeing, United Technologies, General Dynamic and Northrop Grumman are among the top 10 holdings and together occupy 30% of total fund assets. The product has managed to garner nearly $238 million in assets so far and trades in an average volume of 36,000 shares per day. It charges 66 bps in annual fees and returned 6.8% in the past two weeks. It currently carries a Zacks ETF Rank #3 with a Medium risk outlook. SPDR S&P Aerospace & Defense ETF (NYSEARCA: XAR ) XAR tracks the S&P Aerospace and Defense Select Industry index, holding a basket of 35 stocks. Boeing, United Technologies, Lockheed Martin, General Dynamics and Northrop Grumman score among the top 10 holdings, with a combined share of 18.6%. This product has attracted an AUM of nearly $147 million and exchanges nearly 35,000 shares in hand per day. It charges 35 bps in fees per year and gained 4.6% in the last two weeks. The fund has a Zacks ETF Rank #3 with a Medium risk outlook. Original Post