Chinese stocks have underperformed U.S. stocks for years, making them a bargain

Billionaire investor Ray Dalio last week reminded investors what’s important about China: Its rapid and sustained economic growth is so important that it’s risky not to invest there.

He also compared the scope of China’s rise to that of the British Empire and to the industrial revolution.

Chinese stocks have broadly underperformed U.S. stocks for many years. But over the next decade, you might be well-served by diversifying your holdings and investing at least some of your money in the most populous country.

Use fear to your advantage

Investing in China is thought to be risky, not least because of the daily dose of frightening headlines about the U.S.-China trade conflict or the unrest in Hong Kong:

That’s not to say there isn’t any risk. But when is fear overdone?

China ETF

The iShares MSCI China ETF MCHI, -0.11%  tracks the MSCI China Index, which includes 390 stocks of Chinese companies that are available to international investors. For stocks or American depositary receipts (ADRs) listed on U.S. exchanges, the U.S. tickers are used.

To put things into perspective, here are several charts comparing the performance of MCHI, which was established March 29, 2011, to the SPDR S&P 500 ETF SPY, +0.06%.

First, a one-year chart through Aug. 9:

Now two years:

Three years:

Five years:

Seven years: 

So SPY has soundly beaten MCHI for all periods. But there are a few of things to keep in mind:

• U.S. stocks have been on an upward path since the post-crisis bottom in March 2009, in great part because of low interest rates at home and, more recently, negative interest rates in other developed economies. Central banks’ policies have made the world awash with more cash than ever, and the U.S. stock market is considered a relatively safe haven.

• Another important thing to consider is how much easier it has gotten for foreign investors to buy stocks listed in China. MSCI began including the “A shares” (the locally listed shares that weren’t available to investors outside China until rules were eased) in its indexes in May 2018. This potentially means tremendous outside support for companies based in China.

• Despite the current pessimism, there may eventually be a tariff-killing trade deal between the U.S. and China. It may even be possible for us to see one soon, according to analysts at Credit Suisse. On Aug. 13, the office of the U.S. Trade Representative said some tariffs the U.S. had planned to place on imports from China on Sept. 1 would be delayed until Dec. 15 and that some tariffs would be removed entirely.

It is fascinating that a good deal of the volatility for China stocks has surrounded the continued narrative of slowing economic growth. Even so, China’s second-quarter annualized GDP growth rate of 6.2% — its worst in at least 27 years — looks favorable when compared with the 2.1% pace for the U.S. and an anemic 0.2% in the eurozone.

So there is plenty to think about. But it is reasonable to be diversified and include China, especially if you are looking to build a nest egg over the next decade or three.

Largest MCHI holdings

A broad ETF investment may be the best way for you to gain exposure to China. But that approach isn’t for everyone, and you can see that shares of many of the largest publicly traded Chinese companies have performed well. Here are the 20 largest holdings of the iShares MSCI China ETF:

CompanyTickerShare of MCHIIndustryTotal return – 2019 through Aug. 9Total return – 3 yearsTotal return – 5 years
Tencent Holdings Ltd.700, -0.74%15.2%Internet Software/ Services8%81%164%
Alibaba Group Holding Ltd. ADRBABA, +0.51%14.0%Internet Retail16%87%N/A
China Construction Bank Corp. Class H939, -1.17%4.3%Major Banks-7%21%29%
Ping An Insurance (Group) Co. of China Ltd. Class H2318, -0.72%3.9%Multi-Line Insurance28%150%200%
China Mobile Ltd.941, -1.14%3.1%Wireless Telecommunications-12%-22%-6%
Industrial and Commercial Bank of China Ltd. Class H941, -1.14%2.6%Major Banks-6%27%27%
Bank of China Ltd. Class H3988, -0.65%1.9%Major Banks-5%8%10%
Baidu, Inc. ADR Class ABIDU, +0.14%1.7%Internet Software/ Services-39%-41%-55%
Cnooc Ltd.883, -1.70%1.7%Oil & Gas Production1%44%5%, Inc. ADR Class AJD, +0.66%1.2%Internet Retail29%21%-4%
China Merchants Bank Co. Ltd. Class H3968, -0.40%1.1%Regional Banks30%129%187%
NetEase, Inc. ADRNTES, +0.25%1.1%Internet Software/ Services4%26%211%
China Life Insurance Co. Ltd. Class H2628, -0.66%1.1%Life/ Health Insurance10%4%-13%
Yum China Holdings, Inc.YUMC, -0.27%1.0%Restaurants31%N/AN/A
China Petroleum & Chemical Corp. Class H386, -1.50%1.0%Integrated Oil-11%4%-17%
New Oriental Education & Technology Group, Inc. ADREDU, +1.03%0.9%Other Consumer Services89%145%455% International Ltd. ADRCTRP, -1.46%0.9%Other Consumer Services25%-25%3%
China Overseas Land & Investment Ltd.688, +0.60%0.8%Real Estate Development-5%3%31%
TAL Education Group ADR Class ATAL, +3.60%0.7%Other Consumer Services21%225%503%
Agricultural Bank of China Ltd. Class H1288, -0.98%0.7%Regional Banks-7%20%9%
China Resources Land Ltd.1109, -0.45%0.7%Real Estate Development6%60%122%
Source: FactSet

Forward price-to-earnings ratios (based on sell-side analysts earnings estimates for the next 12 reported months) aren’t available form FactSet for all of the companies. However, many of the ratios have declined significantly over the past year:

CompanyTickerForward price/ earnings ratioForward P/E – 12 months ago
Tencent Holdings Ltd.700, -0.74%30.135.6
Alibaba Group Holding Ltd. ADRBABA, +0.51%24.229.8
China Construction Bank Corp. Class H939, -1.17%N/A5.3
Ping An Insurance (Group) Co. of China Ltd. Class H2318, -0.72%N/A13.9
China Mobile Ltd.941, -1.14%N/AN/A
Industrial and Commercial Bank of China Ltd. Class H1398, -1.53%N/A5.6
Bank of China Ltd. Class H3988, -0.65%N/A4.9
Baidu, Inc. ADR Class ABIDU, +0.14%23.020.2
Cnooc Ltd.883, -1.70%N/AN/A, Inc. ADR Class AJD, +0.66%40.547.2
China Merchants Bank Co. Ltd. Class H3968, -0.40%N/A7.8
NetEase, Inc. ADRNTES, +0.25%19.719.9
China Life Insurance Co. Ltd. Class H2628, -0.66%8.912.4
Yum China Holdings, Inc.YUMC, -0.27%24.324.4
China Petroleum & Chemical Corp. Class H386, -1.50%9.210.8
New Oriental Education & Technology Group, Inc. ADREDU, +1.03%35.133.9 International Ltd. ADRCTRP, -1.46%25.237.0
China Overseas Land & Investment Ltd.688, +0.60%N/AN/A
TAL Education Group ADR Class ATAL, +3.60%46.776.2
Agricultural Bank of China Ltd. Class H1288, -0.98%4.44.9
China Resources Land Ltd.1109, -0.45%N/AN/A
Source: FactSet

Here’s a summary of analysts’ opinions of the companies:

CompanyTickerShare ‘buy’ ratingsShare neutral ratingsShare ‘sell’ ratings
Tencent Holdings Ltd.700, -0.74%90%10%0%
Alibaba Group Holding Ltd. ADRBABA, +0.51%98%2%0%
China Construction Bank Corp. Class H939, -1.17%94%6%0%
Ping An Insurance (Group) Co. of China Ltd. Class H2318, -0.72%95%5%0%
China Mobile Ltd.941, -1.14%57%29%14%
Industrial and Commercial Bank of China Ltd. Class H1398, -1.53%86%14%0%
Bank of China Ltd. Class H3988, -0.65%83%17%0%
Baidu, Inc. ADR Class ABIDU, +0.14%57%43%0%
Cnooc Ltd.883, -1.70%89%11%0%, Inc. ADR Class AJD, +0.66%60%40%0%
China Merchants Bank Co. Ltd. Class H3968, -0.40%65%22%13%
NetEase, Inc. ADRNTES, +0.25%75%25%0%
China Life Insurance Co. Ltd. Class H2628, -0.66%83%13%4%
Yum China Holdings, Inc.YUMC, -0.27%79%21%0%
China Petroleum & Chemical Corp. Class H386, -1.50%75%25%0%
New Oriental Education & Technology Group, Inc. ADREDU, +1.03%93%7%0% International Ltd. ADRCTRP, -1.46%78%19%3%
China Overseas Land & Investment Ltd.688, +0.60%100%0%0%
TAL Education Group ADR Class ATAL, +3.60%57%43%0%
Agricultural Bank of China Ltd. Class H1288, -0.98%81%19%0%
China Resources Land Ltd.1109, -0.45%88%12%0%
Source: FactSet

That’s an amazing set of positive opinions for these stocks. Most sell-side analysts are basing their ratings on 12-month outlooks, but the volatility in the performance tables near the top of this article make it clear that any one-year period can be brutal.

Because of the lack of uniformity in the reporting, we have not included sales growth figures. If you are interested in any of the companies individually, it is important for you to do your own research to form your own opinion about the company’s business strategy and long-term prospects.

Tags: , , , , , , , , , ,

Post a Comment

Your email is never published nor shared. Required fields are marked *


Subscribe without commenting