Chinese Stocks - Offering Value?
The Chinese stock market has taken a real hammering since its peak in mid-2009. The chronic underperformance of the Shanghai Composite Index is clearly illustrated by its weak relative performance of more than two years versus the Dow Jones World Index and the Morgan Stanley Emerging Markets Index respectively.
Source: StockCharts.com
Source: StockCharts.com
However, I am of the opinion that inflation in China has probably peaked and that economic policy would now be shifting to drive growth as opposed to fighting inflation. Although export growth could decelerate further as a result of anaemic growth in the mature economies, the focus on domestic consumption should allow the country to avert a hard landing.
China's GDP for the third quarter will be released later this week. I expect it to come in at approximately 9.2%, down from 9.4% in the second quarter.
Sources: CFLP; Li & Fung; Dismal Scientist; Plexus
Asset Management.
Data that caught my attention recently were the significant jump in overseas machinery orders from Japan in August. It was the first month of positive growth since Japan's twin disasters in March. If this was pent-up demand due to capacity constraints as a result of the disasters it would to a large extent explain the weaker than normal seasonal pattern in China's CFLP Manufacturing PMI. It is thus a matter of wait and see what the published numbers will be in early November. Is an upside surprise awaiting us?
Sources: CFLP; Li & Fung; Dismal Scientist; Plexus
Asset Management.
As far as investment in Chinese stocks is concerned, one needs to assess what has been priced in, and it would seem that valuations have fallen to levels from where rallies often commenced in the past (see charts below of the price-earnings multiples of the Shanghai A-share Index and the Hang Seng Index respectively).
Source: Fullermoney.com
Source: Fullermoney.com
Chinese stocks are cheap by all accounts and following an upside key reversal last week after the Chinese authorities' announcement of support for the banking sector, I would be surprised if the recovery does not have more legs into year end.
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Author: Prieur du Plessis
Dr Prieur du Plessis
investmentpostcards.com
With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.
He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).
Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.
Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.
Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.
In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).
Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.
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