Chinese stocks are outperforming the US, but watch out for 'structural issues,' expert warns

Chinese stocks moved higher on Tuesday after President Donald Trump announced plans to delay an additional set of tariffs on Chinese goods that were set to kick in on March 2.

The Shanghai composite posted its best day in nearly four years, and the FXI, an ETF that tracks some of the largest China-based companies, hit its highest level since June. That ETF is outperforming U.S. stocks this year — gaining 15 percent compared with the S&P 500's 11.5 percent — but one expert is urging caution.

"The FXI was definitely very cheap. However, there's really some concerns you have to look at," Chantico Global's Gina Sanchez said Monday on CNBC's "Trading Nation." She specifically notes the ETF's high exposure to financial stocks — the sector accounts for nearly half of the FXI's composition — as a possible source of stress down the line.

"China still has a number of structural issues that it has to face. Now of course it's slowing down very slowly and it continues to put out better numbers than the U.S. But the China story and the [emerging markets] story is now very overcrowded as a trade, so I would be careful there," she added.

While Newton Advisors' Mark Newton likes the trade longer term, he also believes upside is limited for the short term. He thinks investors should take profits now, and then buy any dips.

"Technically speaking we've broken not only an uptrend going back since last year, but we got above $43.50, which has held since last spring. So it's been a big breakout of late," he said.

With the ETF quickly approaching $46, however, Newton believes the run may have gotten a little ahead of itself.

"I do see some negatives in the near term meaning it has moved up a bit too far too quickly. Forty-six dollars is a big level. It's really a 50 percent retracement of the entire move down since last year."

Longer term, he thinks a pullback in the dollar as well as easing trade tensions will propel Chinese stocks.

But for now, since he believes "prospects are limited" in the near term, he doesn't think "now is the time to initiate new longs in China." Instead, he suggests being a "pretty aggressive buyer on pullbacks in the weeks and months to come" since "good relative and absolute progress" means "the intermediate-term story is there."

— CNBC's Eustance Huang contributed reporting.


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's Closing Bell (M-F, 3PM-5PM ET). In addition, he contributes to CNBC and CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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