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New opportunities in Chinese stock market

Publication Date : 30-11-2012


I believe China's stock market now offers very good opportunities for long-term investors. The reason is straightforward: China is the world's fastest-growing economy and yet its stock market is one of the cheapest.

The Hang Seng China Enterprise (H-shares) index is trading at eight times price-to-earnings ratio, a 30 per cent discount on Thailand's SET index. In terms of price-to-book ratio, Chinese stocks are even cheaper than they were in 2008 when the global financial crisis hit. The H-shares index is trading at 1.3 times price-to-book, compared to 1.6 times in 2008.

How did Chinese stocks become so cheap? The major concern for the Chinese stock market has been the growth of the economy. Chinese GDP is expected to grow at 7.5 per cent this year - impressive when you compare that to the global GDP growth of 3 per cent - but it is China's declining rate of growth that is worrying investors. The slowing growth trend is due partly to tepid growth in the US and Europe, China's major export markets, but also in part on the government's effort to prevent the economy overheating.

In 2008, China fought global recession with a massive stimulus package and easy monetary policy. The economy managed to avoid recession but huge government spending and a low interest rate left side effects such as a bubbly property sector and high inflation. Since then, the government has rolled out measures to curb growth in the property sector and control inflation. As a result, GDP growth declined from 10 per cent in 2010 to 7.5 per cent in 2012 and inflation from above 6 per cent to below 2. With inflation now under control, the economic policy has shifted towards growth again this year.

Recent data has shown signs of a recovery, with the Purchasing Manager Index, a leading indicator of GDP, rebounded in October.

Retail sales and loan growth numbers also came in above market expectations, a positive sign that pro-growth policies are taking effect.

With its once-a-decade leadership transition recently concluded, China's new government is expected to roll out more economic policy soon. We believe that the decline in GDP growth has reached rock bottom and the recovery will continue next year.

Of course, China is still a long way from becoming the world's economic superpower, but with improving economic indicators and cheap valuations, its stock market is offering great upside potential. And for long-term investors, the odds are too good to miss!

Komsorn Prakobphol is wealth manager at Tisco Asset Management.


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