The S&P China 500 bucked the trend of a broad market downturn, posting a 2.8% gain for Q2 2022. In terms of sectors, Consumer Discretionary and Consumer Staples grew nearly 15% each over the quarter, while the Industrials and Energy sectors were also additive to performance. The S&P China 500 outperformed the broader S&P Emerging BMI and S&P Developed BMI, which declined 10.3% and 16.3%, respectively.

The index also outperformed regional benchmarks and was the only Asian market to post a positive quarterly return. The S&P Hong Kong BMI was the next-best Asian market, declining 1.1%, while most other Asian markets posted double-digit declines, with the S&P Korea BMI, S&P Taiwan BMI and S&P India BMI receding by 21.4%, 18.5% and 13.6%, respectively.

Despite the recent weakness in the market, the S&P China 500 has maintained strength over the long term. With an annualized gain of 7.8% in USD terms over the past 10 years, the index has easily outperformed the S&P Emerging BMI, which only gained 4.1% over the same period.

Both Onshore and Offshore Stocks Contributed

Both domestic China A-shares, as well as offshore listed China equities, delivered positive returns during the quarter. The first half of 2022 saw much less dispersion of returns among offshore and onshore Chinese equities compared to 2021 when onshore stocks outperformed offshore listings by more than 30%. Due to its diversified composition across all Chinese share classes and sectors, the S&P China 500 posted performance in the middle of most major China equity benchmarks.

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Consumer Discretionary and Consumer Staples Recouped Some of Their Q1 Losses

Consumer Discretionary and Consumer Staples companies outperformed in Q2, returning 14.9% and 14.6%, respectively, and reversing some of their losses from Q1. These two sectors collectively make up just over a quarter of the S&P China 500 and helped drive a positive return for the index for the quarter. Industrials also contributed to performance, returning 4.0%, while Information Technology held up at 0.4% following its Q1 sell-off.

Among the most significant contributors to the index return were alcohol producer Kweichow Moutai in the Consumer Staples sector, up 12.7%, shopping platform Meituan in the Consumer Discretionary sector, which reversed a poor Q1 and returned 24.6%, and Wuliangye Yibin, another beverage company, which returned 23.4%.

Within the Communication Services sector, technology and entertainment conglomerate Tencent was a key detractor mainly due to its size as the top index constituent, decreasing 5.5%. China Merchants Bank (within Financials) and Zijin Mining Group (in Materials) were also key detractors from the index return, declining 14.6% and 22.0%, respectively.

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Price Declines Led to More Favorable Valuation Metrics

The S&P China 500’s trailing P/E ratio ticked up to 15.5x in Q2 (compared with 14.2x in Q1), reverting above the 10-year average. Meanwhile, the rolling one-, three- and five-year P/E ratios remained somewhat elevated compared to the longer-term average.

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The trailing P/E for the broad-based S&P Emerging BMI edged lower (13.1x) as share price declines were broad across ex-China emerging regions. Meanwhile, the S&P China 500’s dividend yield increased from 1.98% to 2.03% on a quarterly basis.

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