Chinese equities are “downright cheap”

In February, Chinese stock indexes traded at multi-year highs, while many leading Chinese equities reached all-time highs. However, a $1.4 trillion share market rout in March saw both China A-shares and Chinese stocks listed in the U.S. trade down around 17% on average.

Now investors are asking, is it time to buy Chinese equities?

According to Matthews Asia Portfolio Strategist, Jeremy Murden, the sell-off has created a big opportunity for investors to grab a bargain.

“Some of the larger internet tech companies took the brunt of that selling and those companies tend to trade in the U.S. and Hong Kong so smaller cap and A-shares did outperform a bit on the downside. But what this has really done is reset Chinese valuations from being frankly a bit rich to fair versus its own history, and downright cheap relative to global alternatives,” he said during a podcast interview.

“The sell-off is driven by sentiment not fundamentals. While the market was down 17%, earnings expectations remain relatively unchanged and with that China is now trading at around 14.5x 2021 earnings. That’s slightly below where we were three years ago when the U.S. – China trade war began (then 14.9x).

“That doesn’t take into account the shift in sectoral composition to more tech and asset light industries that tend to command higher natural multiples.”

Chinese equities
Jeremy Murden of Matthews Asia

Chinese equities better value than U.S.

Jeremy Murden, who’s based in Matthews Asia’s San Fransisco office, says Chinese equity valuations are most stark when compared to the valuations of U.S. companies.

This is despite the Chinese economy’s strong recovery from the COVID-19 pandemic.

“Looking to global comparisons, China now trades at a 35% discount to U.S stocks, despite better growth prospects. Earnings expectations today support the valuations of china,” he said.

“China has a better growth profile (compared to the U.S.) and that holds true from both a macroeconomic perspective as well as an earnings growth perspective.

“I’m looking out at 2021 earnings… Every region’s earnings has some kind of V-shape. The real question is how deep is the V and where do you land on the other side. Also how sustainable is that growth, are you really looking at great 2021 numbers on weak year-over-year comparisons?

“Over the two-year period looking at 2020 and 2021, China is expected to grow their earnings 12.5% per year, the U.S. is going to be up roughly 4.5% per year… Even looking beyond 2021, China is still one of the few places where multiples are still below their earnings growth rates.”

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