Is China Finally Too Cheap For Investors To Ignore?

By:

Head of SPDR Americas Research

  • Chinese equities are poised to post two consecutive years of negative returns
  • Valuations relative to the US are now in the bottom 15th percentile
  • Historically, after posting two consecutive years of declines Chinese stocks have averaged a 32% return in year three, but today’s complex risks present challenges

Chinese equities have suffered more than a 20% drawdown on 47% of the days in the past five years.1 In comparison, US equities have experienced a 20% drawdown just 2% of the time.2

So when will the poor performance of Chinese stocks finally be fully reflected in the price, making them impossible for investors to ignore? That time may be soon.

Two Years of Losses Historically Precede Gains in Year Three

Chinese stocks have already fallen 25% in 2022, on the heels of a 20% decline in 2021.3 And with losses extending from H-shares to Red Chips,4 it’s difficult to imagine anything positive in 2023. But historically, Chinese stocks have posted solid gains after two calendar years of declines.

Over the past 30 years, Chinese stocks have returned an average of 32% following five periods of two consecutive years of losses (2021 and 2022 will likely be the sixth such period). Dating back to 1993, there was only one period (2001 to 2003) when Chinese equities had a third year of losses.

After Two Years of Losses, Chinese Equities Historically See Gains in Year Three

After Two Years of Losses, Chinese Equities Historically See Gains in Year Three

Subpar Chinese Stock Returns Have Improved Valuations

Looking at five fundamental metrics collectively, Chinese equities now trade in the lower 15th percentile relative to US stocks, and the 20th percentile relative to their own history dating back to 1995. And no single metric is above the 40th percentile.

Chinese Stock Valuations Are Inexpensive

Chinese Stock Valuations Are Inexpensive

Historically, when both valuation screens have been in the lower 20th percentile, subsequent 12-month returns averaged 9.4%, beating the average overall 12-month return of 5.9%.5 And the performance of Chinese equities has historically outpaced US stocks by an average 4.5% when valuations have been as inexpensive as they are now.6

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Footnotes

1 Bloomberg Finance, L.P. based on the daily return of the S&P China BMI Index as of September 20, 2022
2 Bloomberg Finance, L.P. based on the daily return of the S&P 500 Index as of September 20, 2022
3 Bloomberg Finance, L.P. based on the daily return of the S&P China BMI Index as of September 20, 2022
4 Bloomberg Finance, L.P., A-shares = Shanghai Shenzhen CSI 300 Index, H-Shares = Hang Seng Index, Red Chips = MSCI China Red Chip Index, and ADRs = S&P China ADR Index as of September 20, 2022
5 Bloomberg Finance L.P. as of September 19, 2022 based on SPDR Americas Research calculations based the S&P 500 and the S&P China BMI Index fundamental metrics from 1995 to 2022.
6 Bloomberg Finance, L.P. as of September 19, 2022 based on SPDR Americas Research calculations based the S&P 500 and the S&P China BMI Index fundamental metrics from 1995 to 2022.
7 FactSet as of August 31, 2022
8 “China’s Growth Prospects Weaken as Economists Cut 2023 Forecasts”, Bloomberg August 28, 2022
9 “China’s Growth Prospects Weaken as Economists Cut 2023 Forecasts”, Bloomberg August 28, 2022
10 “China’s Next Megaprojects Are Key to Reviving Flailing Economy”, Bloomberg August 25, 2022
11 Bloomberg Finance. L.P. as of September 20, 2022
12 “China’s 2022 property sector outlook worsens, home prices seen falling”, Reuters September 6, 2022

Glossary

China Credit Impulse Index
Credit impulse index = new loans / GDP Credit impulse index measures the credit cycle in a market. When the economy recovers, the index rises

S&P 500 Index
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

S&P China BMI Index
The S&P China BMI Index is a market capitalization weighted index that defines and measures the investable universe of publicly traded companies domiciled in China, but legally available to foreign investors.

Originally Posted September 23, 2022 – Is China Finally Too Cheap for Investors to Ignore?

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