China Stock Bargains Even More Elusive After Selloff Goes Globalby and
Shanghai shares trade at 34% premium to emerging-market peers
Mainland markets re-open after week-long lunar new year break
For once, it wasn’t China’s fault.
With the country’s markets closed for lunar new year holidays last week, global equity investors found plenty of other reasons to sell -- everything from sliding oil prices to shrinking bank profits and crumbling faith in global monetary policy. The MSCI All-Country World Index plunged 2.6 percent, entering bear-market territory for the first time in more than four years.
While the rout may help Communist Party officials counter perceptions that China is the biggest risk for global markets, investors in yuan-denominated A shares found little to cheer about as trading resumed on Monday. The Shanghai Composite Index dropped 0.6 percent at the close after valuations in the $5.3 trillion market, inflated by a record-breaking bubble last year, looked even more expensive versus their beaten-down global peers.
China’s benchmark index trades at a 34 percent premium to MSCI Inc.’s emerging-markets index -- up from an average gap of 10 percent over the past five years -- and equities in the tech-heavy Shenzhen market are almost four times more expensive than their developing-nation counterparts. Shares with dual listings, meanwhile, were valued at a 46 percent premium on the mainland relative to Hong Kong before today, near the widest gap since 2009.
“There’s been a lot of embedded selling pressure in the A-share market,” said George Hoguet, a Boston-based global investment strategist at State Street Global Advisors, which has $2.4 trillion under management. “I don’t think the market is fully cleared yet.”
While the Shanghai Composite has dropped 22 percent in 2016, the gauge is still up 31 percent over the past two years, a period when the MSCI Emerging Markets Index sank 22 percent. The Chinese stock measure is valued at 15 times reported earnings, versus 11 for the developing-nation gauge, according to data compiled by Bloomberg.
Chinese markets will be volatile when they reopen as investors determine where they “sit in the global marketplace,” Garrett Roche, a global investment strategist at Bank of America Merrill Lynch, said by phone from New York. The firm oversees $2.5 trillion in client assets.
“From the Chinese perspective, we are relatively nervous about it anyway, so it won’t change our view that the selloff hurts,” he said.
Investors shouldn’t read too much into what happens in global markets when assessing the outlook for Chinese equities because the country still has a relatively closed financial system, said Eric Brock, a Boston-based money manager at Clough Capital Partners. The Shanghai Composite’s correlation with the MSCI All-Country index over the past 30 days was less than half that of the Standard & Poor’s 500 Index, data compiled by Bloomberg show.
“It’s always hard to draw a direct connection to trading in Shanghai versus the rest of the world,” said Brock, whose firm oversees $876 million.
Chinese stock investors still have plenty to worry about at home. Official figures due on Monday are likely to show exports dropped for a seventh straight month in January, according to economist estimates compiled by Bloomberg. Data released on Feb. 7 showed the nation’s foreign-exchange reserves shrank to the lowest level since 2012 as the central bank sold dollars to combat a tumble in the yuan.
Moves in overseas markets last week suggest A shares are due for losses. The U.S.-listed Deutsche X-trackers Harvest CSI 300 China A-Shares ETF sank 0.7 percent to $21.50 during the Chinese holiday, while the Hang Seng China Enterprises Index of mainland companies in Hong Kong dropped 6.8 percent.
The declines in Hong Kong led to a 7.4 percent increase in the Hang Seng China AH Premium Index last week, suggesting that mainland shares may retreat on Monday to bring prices closer in line.
“We’ve seen some of the post-Chinese new year reaction already in the H-share stocks,” Geoffrey Dennis, head of global emerging-market strategy at UBS AG, said by phone from Boston. “I’m hopeful people will keep calm about the A-share market, but I’m sure it will pull back a fair bit on the first day.”