It’s easy to make a long list of reasons to be skeptical about Chinese stocks. There is their price rally in July, the recent Hong-Kong-related U.S. sanctions and, more generally, the further escalation of the China-U.S. trade dispute and the collapse in world trade due to Covid-19. And there are other potential risks from Covid-19 and the repercussions of the worst economic slump in decades.
In this "Chart of the Week," however, we focus less on the absolute and more on the relative attractiveness of Chinese equities, starting with taking a look at the different stock indices in China and Hong Kong. The tail light, with an annual decline of almost 9%, is the Hang Seng Index. Its focus on Hong Kong has not helped it this year. Political unrest, export dependences and its composition, with an overweight in finance, utility and real-estate stocks, have made a toxic mix this year. The Hang Seng China Enterprises Index (HSCEI), which is strongly oriented to Chinese state-owned corporations, has not fared much better. Profits were made elsewhere – for example in the Chinext Index, which specializes in young technology companies and mainly attracts Chinese retail investors. The broad-based MSCI China Index also showed good performance, additionally benefitting from the inclusion of a technology heavyweight that had previously only been listed in the United States. A third of the index's market value is now accounted for by just two technology stocks – a trend not so dissimilar to that of the U.S. equity market. The more domestically oriented CSI 300 Index is also evolving to reflect structural changes in China. In 2010 the less industry-focused, "modern" sectors such as technology, telecommunications, pharmaceuticals and (online) retail accounted for only 20% of this index. Now that figure is twice as high. It is therefore unsurprising that both the price development and the quite modest cut in the earnings estimates of these indices compares more closely to the Nasdaq-100 than the MSCI World Index – as the "Chart of the Week" shows.
The higher earnings stability of the indices is only one of the ways in which they have improved since 2015 when the Chinese equity market collapsed abruptly shortly after it had soared. In addition, both market participants and regulators have likely gained considerable experience.
Sean Taylor, DWS's APAC Chief Investment Officer summarizes: "Covid-19 remains a risk, but for the world as a whole. China is ahead of other countries in managing the pandemic and is now the only major country where we expect to see economic growth this year. The capital market and the structure of the economy have evolved significantly, so I now consider Chinese equities to be much more attractive than in 2015 compared to other markets."
Sources: Refinitiv, DWS Investment GmbH as of 7/15/20
Appendix: Performance over the past 5 years (12-month periods)
|06/15 - 06/16||06/16 - 06/17||06/17 - 06/18||06/18 - 06/19||06/19 - 06/20|
|CSI 300 Index||-28.2%||18.8%||-2.2%||11.5%||11.3%|
|MSCI China Index||-23.3%||32.3%||21.3%||-6.7%||13.1%|
|MSCI World Index||-2.8%||18.2%||11.1%||6.3%||2.8%|
|Hang Seng Index||-17.5%||27.8%||16.3%||2.5%||-11.7%|
Source: Bloomberg Finance L.P. as of 06/30/20
Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect.