What the heck is going on with Chinese stocks? Over the past six months, Chinese stocks — more specifically the A-shares traded on the mainland — have been on a tear. Yet since the beginning of the year, stocks in that same segment have come under fire.
Meanwhile, Chinese stocks in Hong Kong have been relatively calm in the face a whole lot of fluctuating China economic data, a recent interest rate cut and still relatively attractive valuations.
In Shanghai, the so-called China A-shares segment had been one of the darlings of the international equity markets in 2014. Over the past six months, the benchmark A-shares ETF, the Deutsche X-Trackers Harvest CSI 300 China A-Shares ETF (NYSEARCA:ASHR), is up some 39.2%. Yet since the beginning of the year, ASHR has actually fallen 3.7%.
As for stocks traded in Hong Kong, the iShares China Large-Cap (NYSEARCA:FXI), a fund pegged to the 50 largest stocks traded on the Hong Kong exchange, is down slightly over the past six months, and is lower by 1.8% since the beginning of the year.
Meanwhile, some of the biggest-name Chinese stocks traded here in the U.S. via ADR have seen a lot selling. For example, energy giant China Petroleum & Chemical Corp (ADR) (NYSE:SNP) has seen its shares plunge some 21.8% during the past six months as lower global oil prices have put pressure on the Chinese behemoth.
Lower oil prices also have put solar stocks under pressure, and in particular Trina Solar Limited (ADR) (NYSE:TSL), which has seen its value fall 19.9% in the past half year. Then there’s last year’s IPO darling Alibaba Group Holding Ltd (NYSE:BABA). The gigantic online and mobile commerce company was considered the poster child for Chinese stocks going forward, but the only problem is that poster is looking really weathered.
BABA shares are down 12.7% over the last six months, and that loss has accelerated in 2015, as through the first nine weeks of the year BABA stock has plunged 22%. That’s not the kind of poster boy you want if you own Chinese stocks.
Chinese Stocks Are Hurt by a Growth Slowdown
One big reason for the slowdown in many Chinese stocks is simply China’s slowing pace of economic growth. Although by now you would think that the slowdown in China’s GDP growth was largely priced in to Chinese stocks, this really hasn’t actually been the case.
Those growth concerns were inflamed a bit last week, as Beijing lowered its economic growth target for this year to approximately 7%. That target, while still robust by U.S. standards, is down from the previous official growth target of 7.5% in 2014. The actual GDP growth rate came in at 7.4% for 2014, and that was the slowest growth the country has seen since 1990.
Other metrics of concern for Chinese stocks include a lackluster manufacturing PMI index print, which came in at 49.9 during February. While the number was slightly above expectations, it also is below 50, which is the key metric indicating economic expansion.
On the plus side for Chinese stocks, at least on the surface, was the People’s Bank of China’s (PBOC) recent move to cut borrowing costs. The PBOC edged the one-year deposit rate lower by 25 basis points to 2.5%, and the one-year lending rate also by 25 basis points to 5.35%. The new rates became effective March 1.
The timing of the cut was a surprise, but many were anticipating more easing by the PBOC. Recall that in November, the Chinese state bank cut rates for the first time in two years, and then in February it lowered the amount of money banks need to hold in reserve. Still, the easy money policies of the PBOC have so far failed to really lure buyers back into Chinese stocks.
Chinese Stocks are Historically Cheap
For Chinese stocks, however, there is a positive here at current levels, and that positive is attractive historical valuations.
According to a recent piece in The Telegraph, Chinese stocks are historically cheap based on the current cyclically adjusted price-to-earnings ratio (CAPE) relative to its long-term CAPE average.
The paper did an analysis of the CAPE, which is the aggregate price of a market’s shares divided by the profits made by its constituent companies, and with those prices averaged over the previous decade to iron out fluctuations in the economic cycle.
Based on The Telegraph’s analysis Chinese stocks have a rating of 21, which represents a 35% discount from the average CAPE of 32. As for Chinese stocks in Hong Kong, they are even a better value, trading at a CAPE of 15 versus a long-term average of 21.
The bottom line here is that if you’re looking for markets with attractive valuations, then Chinese stocks in the mainland and Hong Kong both look good based on their respective historical averages.
So, if you can stomach the latest Chinese stocks flux fest, then right now might be a good time to take a trip to China.
As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.