Is It Time To Get Excited About Chinese Equities?

Shifts in China Sector Perf

Does China’s Valuation Indicate Strong Return Potential?

China, like any emerging market country, is never without significant risks. For example, it is easy to tweet about possible trade deals in order to grab headlines, but to actually negotiate bilateral trade agreements all the way to completion is notoriously difficult.

Fortunately, China’s equity market is currently trading near the steepest discount on a forward P/E ratio basis that we have seen since June 2016. A lower forward P/E ratio on its own could mean very little, but seeing a lower valuation at a time when one is getting ready to possibly capitalize on an improvement in relations between China and the U.S. could make such a strategy more interesting.

Figure 3: China’s Equities Trade at a Steep Discount to U.S. Equities

(Click on image to enlarge)

Chinas Equities Trade at a Steep Discount to U.S. Equities


Conclusion: China May Go Down, but It’s Never Out

It is easy to get wrapped up in the short-term thought processes and headlines that always surround China. The fact is, this is the world’s second-largest economy. It is a massive market that, even if growth is slowing, is still far outpacing what’s seen in developed markets. There can always be downdrafts, but in our view, it’s important to look forward, as the next rally can also be right around the corner. 

1Source: Bloomberg, with data for 2018 from 12/31/17 to 12/31/18 and for 2019 YTD from 12/31/18 to 2/22/19. 

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