If we were to go back 5 years and read the advice given by the strategist of the major investment banks and the heads of theasset management of famous international managers in 2019 we would find an almost unequivocal push towards investment in Chinese stock markets, in the future perspective a real must. And for intellectual honesty I say that we at Banca Patrimoni Sella & C. also had the same view.
The world’s fastest growing large country, the second largest market by market capitalization opening up to foreign investors, the inclusion of Chinese companies in Fortune500-type rankings and global stock indexes, the new Silk Road, the government’s ambitious plan made in China 2025, its hundreds of millions of people becoming more affluent, consuming, traveling… I could go on.
Advice like this was everywhere:
Today we are probably at the opposite extreme with the few who have resisted recommending Chinese stocks raising the white flag one after another in the face of years of negative and hyper underperforming stock markets, a picture of internal slowdown, the real estate crisis, the Chinese spending less than before, the US-China “war” that does not decrease in intensity.
As always, numbers say more than words:
- Today the 7 largest American companies (the famous magnificent seven) are capitalized as much as all the approximately 5,400 listed Chinese companies put together (14tr Usd). Ten years ago, as you can see, the ratio was a much healthier 1 to 7.
- Chinese stocks weighed 42% within the MSCI Emerging Markets index at the end of 2019, today they weigh 24% with India up to 20% on course to overtake. Today the index that is doing the most is the MSCI Emerging Markets ex China, something unthinkable 5 years ago.
- The weight of foreign investors in the country is declining, with flows into the South Connect program (which allows investment in Chinese shares listed on local stock exchanges) going from a record of around USD 70 billion per year to zero.
- The MSCI China index from January 2019 to the end of August 2024 lost 30% while the MSCI World index gained 100%.
Will the truth be somewhere in the middle as always? In my opinion, yes. Today, Chinese stock valuations are truly pessimistic given that the only ones who support them are local investors and investment funds; to be clear, the average price-earnings ratios are in the 10 area versus 18 for global stocks and 23 for Indian stocks. Chinese technology companies trade at a steep discount to their global peers and we are talking about giants of the caliber of Alibaba, Baidu or Tencent. Nongfu Spring, the company that produces and sells mineral water and that made the gentleman below the richest man in China, trades at multiples equal to those of the Swiss Nestlé (the ratio was instead 2 to 1 only three years ago) despite enormously greater future growth prospects.
There are some trigger that things can change soon? Probably not with deglobalization continuing, the real estate issue that will take a long time to resolve, the United States doing everything to make life difficult for the Chinese (blacklist companies, disincentives for American asset managers operating or investing in China, tariffs, etc.), government “initiatives” at the expense of private entrepreneurs in some sectors have left a deep mark.
China will become uninvestable like Russia? No. We are talking about two very different realities, with incomparable influences in the world, with incomparable ambitions. The road to “greatness” China and the Chinese will continue to travel because it is their goal, the country needs the rest of the world, the Chinese must internationalize their currency, the government has no interest in an even stronger trade war. Just read the news not in Western media to realize this.
So? A nice accumulation plan on Chinese stocks is the simplest and probably the right solution.
