As we mark Chinese New Year and stock markets there enjoy a brief holiday respite, it provides us with an opportunity to re-assess the case for investing in the country.
It is fair to say the Sinophile investor experience since 2021 has been a series of disappointments. Returns have materially lagged other markets.
Growing trade tensions with the US, a slowing economy, rising debt levels, a real estate market crisis, government crackdowns on private sector firms, have all sent overseas investors scurrying. Critics have coined the phrase "the Three Ds" – debt, deflation and demographics – as reasons to avoid the stock market.
Others labelled the market as uninvestable.
Why Should I Invest in China?
Despite this, China equities make up around one quarter of the emerging market index and the second-largest economy in the world, and its stock market has a history of delivering tremendous gains for investors, most recently in 2019 and 2020.
Since then, though, the index has fallen more than 50%, and it is clear there are signs of outright capitulation both within and (especially) outside China when it comes to assessing Chinese equity risk.
A core thesis for an investment in China revolves around valuation.
The price/earnings multiple for China is around 10x, which looks attractive compared to history. It requires patience, but investing in markets that are trading well below their intrinsic value is a solid basis on which to build a position.
Why MIM is Still Excited
In addition, investors can assess a raft of dynamic and innovative firms, often in the technology sector.
For example, the largest holding in the index is Tencent (TCEHY), which reported a return on equity of 23.9% and operation margin of 28.6% in its most recent financial results. These are levels of profitability in line with other more-highly-rated technology firms.
This is just one example of a large index constituent where economic uncertainty is reflected in the stock price.
The final point we would make on China is sizing. Given the risks, we are exercising a degree of caution in the amount of capital we have deployed in the market.
Nevertheless, we remain excited by the long-term opportunity.
Mark Preskett is senior portfolio manager at Morningstar Investment Management
