Oaktree Buys Cheap Chinese Stocks as U.S. Fairly Valued
Oaktree Capital Group LLC (OAK), the world’s largest distressed-debt investor, is buying Chinese stocks after valuations tumbled, Chairman Howard Marks said.
The nation’s equities are “tremendous bargains,” Marks said at a media briefing in Shanghai today, declining to name the specific shares he’s purchasing. U.S. stocks are “fairly to fully valued,” he said. The Shanghai Composite Index (SHCOMP) has dropped 5.3 percent this year even as the Standard & Poor’s 500 Index jumped 24 percent.
While China’s economy faces risks from being weaned off stimulus, a burgeoning middle class and government plans for urbanization will bolster the country’s long-term potential, Marks said. The Shanghai Composite is valued at 1.4 times net assets, a 44 percent discount versus the S&P 500. That compares with an average premium of 6 percent for the Chinese gauge during the past five years, data compiled by Bloomberg show.
“We are investing in Chinese equities along with emerging markets,” Marks said. “Investors have lost all confidence in China.”
While the country contributed most to the global economy’s rebound from the 2008 financial crisis, growth is slowing as the ruling Communist Party reins in an unprecedented $1.6 trillion lending boom in 2009 that helped send home prices to all-time highs and left local governments with record liabilities.
President Xi Jinping and Premier Li Keqiang are trying to transform China into a consumer-led economy from an exporter reliant on a managed currency. Li has championed urbanization as a “huge engine” for growth as he encourages rural workers to move to cities and boost spending. Communist Party leaders will enter a policy-making summit this week to map out a blueprint for reform.
The Shanghai gauge rose less than 0.1 percent as of 2:08 p.m. local time, paring its decline during the past three years to 29 percent. The Hang Seng China Enterprises Index (HSCEI) of mainland companies traded in Hong Kong rose 0.3 percent, reducing its three-year drop to 21 percent. The MSCI Emerging Markets Index has slipped 8.8 percent since 2010, while the S&P 500 rose 48 percent.
The U.S. stock index’s price-to-earnings ratio has increased 18 percent this year to 16.7, near the highest level in more than three years, even as U.S. gross domestic product is projected to expand 1.6 percent, almost half the rate of 2012, data and estimates compiled by Bloomberg show. The 15-year average multiple is 19.3.
“U.S. stocks have moved from being cheap to fair,” Marks said. “It’s not overpriced in the context of history.”
While investors were too optimistic about China’s prospects three years ago, they may be too pessimistic now, Marks said. The Shanghai Composite’s price-to-book ratio is about half the level it reached in November 2010, while the measure’s price-to-earnings multiple is 42 percent lower.
“The swings of the pendulum were excessive,” he said. “Perhaps this time too.”
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