Name This Country: Market’s Down Two-Thirds, Pros Smell Value

In terms of growth potential, it’s not exactly a state secret that China’s economy, as befits an emerging industrial power, runs circles around our economic growth.

While the U.S. would be thrilled if GDP growth could hit 3%, China is dealing with a slowdown that has knocked its growth down to 6% or so. So both economies are struggling, right? Now take a look at how that has played out in each country’s stock market.

^SSEA Chart

^SSEA data by YCharts

Francois Sicart, founder of Tocqueville Asset Management, noted in a recent shareholder letter that the Shanghai stock market remains nearly two-thirds below its frothy 2007 peak.

^SSEA Chart

^SSEA data by YCharts

“This has shocked many former unconditional enthusiasts of the Chinese stock market. The anxiety has been compounded by the rebirth of all the old arguments why the success of China’s hybrid economic and political system cannot last. At the very least, I find this conjunction of factors intriguing for a contrarian investor,” wrote Sicart.

In mid-September, Jeff Gundlach of Doubleline told a Bloomberg investor conference that he thinks the sell off in China now spells opportunity. “In general, equities should be bought when there’s fear, rather than when there’s enthusiasm,” Gundlach said, adding that his trade would be to short the S&P 500 and go long China.

Russ Koesterich, global chief investment strategist for BlackRock’s iShares operations is also in the camp that China offers a compelling valuation. “[China]Stocks are trading close to trough valuations, with the price-to-earnings (P/E) ratio at less than nine times forward earnings and price-to-book (P/B) at around 1.25. Our in-house model is forecasting growth of approximately 7.8% to 7.9% in the third quarter, slightly ahead of the consensus,” Koesterich wrote in a recent blog post.

He notes there are of course some headwinds to be mindful of, but Koesterich concludes that investors have seemingly taken much of that into account already: “I feel that the slowdown in growth is already reflected in the price of Chinese equities. Should the economy decelerate further, I would revisit my view. But for now, I think the bad news is already baked into the price,” wrote Koesterich.

If you’ve got an emerging markets ETF tucked into your portfolio you likely already have exposure to the China market. For example, the $59 billion Vanguard Emerging Markets ETF (VWO) has nearly 19% invested in China. For a more direct stake, there’s the iShares MSCI China ETF (MCHI) and the SPDR S&P China ETF (GXC).

VWO Chart

VWO data by YCharts

China Mobile (CHL) and energy firm CNOOC (CEO) rank among the 10 largest holdings in all three ETFs. Both companies have fared better than broad market China averages over the past three years.

CHL Chart

CHL data by YCharts

For the dividend seeker, China Mobile’s current yield is above 3%.

Carla Fried is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.



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