A mispriced asset class creating a long-term opportunity

Chinese equities are trading at extremely attractive levels, and in our view, the outlook is highly prospective for long-term investors. We believe the issues facing the Chinese economy are well-known and manageable. Many new policies and initiatives have been introduced to support and stimulate the economy as the Government has set its GDP growth target for 2024 at ~5%, which demonstrates confidence and determination to boost economic growth. After many regulatory reforms, there remains an abundance of quality companies with sustainable growth in selected Chinese sectors that are trading at depressed levels, and they are continuing to execute in the current environment.

Growth at more than a reasonable price. The CSI300 index is trading at an average price to earnings multiple of 11x, which implies an earnings yield (earnings per share / share price) of 9%. In contrast, China’s 10yr Government Bond yield is at 2.3%, a spread of roughly 7%, levels not seen since early 2019. Even more astonishing is the fact the CSI300 dividend yield is 3%, almost double that of the S&P500 index, a spread not seen since 2013.

As stated in our February 2024 insights, the current set-up in China reminds us of the Global Financial Crisis (GFC) in 2008/2009 when the US financial markets were under tremendous pressure. In hindsight, a great time to buy US shares and position for the long term. Quality businesses with sustainable growth benefited from multiple expansions and strong share price appreciation since that period.

A similar amazing long-term opportunity is on offer in China right now! Valuations for Chinese equities are at extremely attractive levels and represent a very exciting entry point given companies are executing and growing earnings (Exhibit 4) in the current economic backdrop.

Lastly, periods of trough valuations (shown as the China earnings yield spread to 10-year government bond yield) have typically been followed by periods of price appreciation for Chinese shares (Exhibit 5). Valuations for Chinese equities are at depressed levels, and at a time when government authorities are dedicated to restoring confidence and reinvigorating the economy. Quality businesses will continue to grow and become champion businesses in the coming years. Now is the time to invest and take advantage of the very attractive valuations. 

As we have stated previously, it is important to consider the multiple catalysts and act now given:

1. the property market is stabilising,
2. China QE “PSL” is supporting the economy (and restoring confidence) at this juncture,
3. Chinese capital replacing international flows in the Hong Kong equities market,
4. National Team providing stability, and
5. geopolitical stabilisation.

At Ox Capital, we are focussed on quality companies with long term growth which are available at inexpensive valuations across emerging markets. Current valuations are providing lots of interesting opportunities. Let us know if you would like to understand specifically where we are finding the opportunities!

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