Investors have heard this a few times this year: Chinese stocks are inexpensive and trading at valuations that are below those of broader emerging markets benchmarks.
Appealing valuations on Chinese stocks can be spotted on H-shares and in the A-shares traded on the mainland. Stocks in Shanghai and Shenzhen are nowhere close to the all-time highs set in 2007 and 2008. [A-Shares ETF a China Standout]
Yet as Beijing pushes its new reforms, Chinese could get even cheaper. “China’s shares are trading at 9.3 times 12-month forward earnings, a more than 22 percent discount to the long-term average, and at 1.6 times price-to-book, a more than 26 percent discount to the long-term average,” Leslie Shaffer reports for CNBC, citing Nomura.
Following the Third Plenum, which concluded in mid-November and included reforms such as the liberalization of China’s long-standing one-child policy, China ETFs rallied. Some, including the iShares China Large-Cap ETF (FXI) , jumped more than 6% last month. But some of the wind has come out of the Plenum trade in December.
Since the start of this month, some China ETFs have traded lower while most have lagged the 0.6% returned by the Vanguard FTSE Emerging Markets ETF (VWO) , the largest emerging markets ETF. [Beijing Reforms Lift China ETFs]
The reason, as CNBC notes, is expectations that some of Beijing’s reforms could actually hinder smaller Chinese firms by constraining their access to credit. That could prove to be bad for some highly-leveraged Chinese small-caps.
China’s A-shares are still viewed as tempting and are seen as a significant global investment opportunity because, until recently with the introduction of ETF’s such as the db X-trackers Harvest CSI 300 China A-Shares Fund (ASHR) , A-shares markets had been difficult to access for foreign investors.
“The China A-shares market has long been recognized as one of the world’s most coveted investment opportunities. Chinese A-shares are representative of world’s second-largest economy and yet in the past they have been notoriously difficult for foreign investors to access,” said Deutsche Asset & Wealth Management Managing Director Martin Kremenstein in an email exchange with ETF Trends.
While global investors are not over-allocated to the A-shares, there are signs they are reaching heavy allocations to Chinese stocks. “In December, more than 60 percent of emerging market fund managers were overweight on China’s market, according to a Bank of America-Merrill Lynch survey,” CNBC reported.
That made China the second-most popular emerging market in the survey behind Russia, another deeply discounted developing market.
iShares China Large-Cap ETF