Hang (Sheng) tough on China stocks

May 6, 2015 11:31 AM (UTC+8)

 

Asia Unhedged detects a bit of consternation about the latest dip in Chinese stocks.

Investing would be a cinch if you could peer into a crystal ball. Asia Unhedged doesn’t profess to have any new information about China’s stock market. But a word to the wise: Bull market reverses and bear market rallies tend to be violent because the positioning is so one-sided.

Tuesday’s 4.1% plunge on the Shanghai Composite Index prompted predictable speculation about the demise of China’s bull market. But only the riskiest soothsayers would hang their prophecies on the basis of a single day’s trading. Chicken Little mistook a falling acorn for a piece of sky, and if you wait long enough, another global recession might level all stock markets worldwide. In the meantime, Asia Unhedged says the Hang Sheng China Enterprises Index still offers better fundamentals than the MSCI Global Index at half the earnings multiple.

As of the end of Q1 2015, the MSCI Global Index had a Price/Earnings multiple (before XO) of 20, vs. 9 for HSCEI. Operating and profit margins are somewhat higher for the HSCEI than for the MSCI Global. This shouldn’t surprise anyone given that China’s economy is growing much faster than other countries — even if its still enviable growth rate has slipped to 7% or so.

Asia Unhedged also asserts that the positive outlook for Chinese equities (especially H-shares trading at a discount to corresponding A-shares) remains unchanged. This is based on the fact that Chinese valuations are much lower than alternatives. With high real interest rates, China also has enough room for further monetary easing by its central bank. The gradual opening of two-way flows between Chinese and world markets eventually will eliminate the H-share discount. China’s ongoing market and economic reforms are overall pluses for the stock market. This, despite the fact that long-overdue steps to control margin leverage could spark short-term selling.

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