China and Hong Kong Stock Markets

Take a look at the table below which tabulates the P/E ratios by country.  China, Hong Kong and Singapore the triple Asian countries/regions have cheap stocks!  These stock markets can rightly be classified as value stocks markets where prices are highly depressed.  Assets bought cheap can mean high future returns should the P/E ratios later revert to mean.

Japan on the other hand shows signs of that of a market full of growth stocks.  This might mean that going forward, Japanese stocks will continue to be lethargic if growth were not to pan out.  Japan seems like there is no end in sight of its abysmal market since its peak in 1989.

Country P/E
China 10.76
Hong Kong 11.27
Singapore 11.71
France 12.32
USA 14.41
German 14.62
UK 15.04
Canada 15.20
India 16.18
Australia 17.45
Brazil 19.96
Japan 24.61

I’m particularly optimistic of the China and Hong Kong stock markets because of the following chart in addition to the P/E ratio.  If you look at the Big Mac index, you can see that the Hong Kong and China currencies are highly depressed.  The currencies of both markets can only increase in prices.  Should this be the case, you will gain the currencies differentials in addition to the fluctuations in stocks prices.  It’s probably about time for Hong Kong to re-peg its currency to higher level.  Ditto for China.

 

Frankly speaking, in recent years, China’s stock market is nothing short of devastating.  The Shanghai composite index has plunged from the 5900 level from the pre-financial crisis era to its current level of 2000.  Sentiments of Chinese investors are particularly poor right now – if you can understand Chinese, you can read their bitter diatribes on the various forums on the net and this is understandably why.  The China stock market has become a bottomless money pit sucking in billions of hard earn money.

This in my opinion is exactly why it is a good time to invest in the China stock market.  To borrow a quotable quote from Warren Buffett, “be fearful when others are greedy, and be greedy when others are fearful.”  This is exactly the scenario right now.  And Mr. Buffett reminds us of his successful strategy, “the lower things go, the more I buy”.  Ask yourself, on your grocery buying trips, do you buy more or less of a food item when the price goes down?

Over the shorter term of a few years, market sentiments are paramount and prices can sway either way, just like the drop of China’s stock prices right now.  However, over the longer term valuation will stand out.  As Benjamin Graham said, in the short term, the stock market is a voting machine (easily swayed by emotions and sentiments), but in the long term it acts like a weighing machine (that is quantitative in nature).  True value will in the long run be reflected in its stock prices.  That said, if your funds are short term in nature and you’ve no holding power, you should not hold volatile assets of any kind.  You will not have the time frame to let the zigs and the zags to cancel out each other.

Some of you might think that the strategy of buying low P/E stocks is unsound and purely simple minded wishful thinking.  However, numerous academic studies show that value strategies such as buying low P/E stocks historically have the potential to outperform the market by a few hundred basis points per year over the long term.  The data has further been validated over multiple sub-periods and countries.  The future of the China stock market might be the exception by personally I won’t count on that.  Like the China’s economy, the China’s stock market should have a bright future.

2 thoughts on “China and Hong Kong Stock Markets”

  1. The creation of the Chinese stock market in the early 1990s, however, served a different purpose: to recapitalize and restructure large state-owned enterprises (SOEs) that otherwise would have gone under.

  2. Yes, SOEs were indeed capital inefficient. But these were the bygone days. In today’s new era, the enterprises are professionally managed and profit motivated.

Leave a Reply