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China A-Shares: Cheap China

This is the final in a 10-part blog series where I went through each of the charts from the 10 Charts to Watch in 2019. The purpose is to add some extra comments and context around the charts, as well as to explain some of the finer details of the indicators.

The final chart is on China - as I noted in the article, China took the number 10 spot last year too, and in many ways is again one of the most important charts. The chart shows PE valuations for China A-shares over the last couple of decades.

Main point: Chinese stocks are cheap.

China A-share valuations (excluding financials)

First a quick note on the chart. The valuation metric is price vs trailing earnings, and it is displayed for China A-shares unadjusted (blue line), and excluding financials (black line). The reason for excluding financials is that the biggest push-back you typically get when claiming Chinese stocks are cheap is that there is too much uncertainty around asset quality and sustainability of earnings with the banks. But we can clearly see that the black line is trading at the bottom end of the range, even if it is trading at a slight premium to the unadjusted figures. So the conclusion doesn't change.

And why are Chinese stocks cheap anyway? As I noted in the 2019 charts:

"A lot went wrong for China last year, and in my mind that simply sets the stage for things to go at least less wrong, if not right for China this year. Trump has helped make China A-share valuations great again (cheap again). All that’s required now is a catalyst and I can see multiple candidates."

Basically you had a slowing economy, asset allocation rotation by retail punters into the better performing property market, falling earnings momentum, and political/policy uncertainty in the form of the trade war and tighter policy settings.

Looking ahead, key potential upside catalysts include: possible more forceful stimulus measures, rotation back out of property into stocks if property slows, possible resolution of the trade war, and better confidence/risk sentiment across emerging markets in general.

As I've said elsewhere, for longer term investors - buying when valuations are cheap puts the odds in your favor. And a lot of the time valuation speaks for itself. So maybe after a year where a lot went wrong, perhaps China is due for some better times ahead...

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