The Chinese stock market has faced three consecutive years of declining performance, and to exacerbate the situation, the initial weeks of the new year are unfolding as the most challenging since 2016. Analysts are increasingly observing this market with a more favorable outlook. Valuations of Chinese companies have become highly attractive, and there is a growing belief in the potential reversal of the prolonged downward trend.
Major indices of the Chinese stock exchange continue to experience a downward trajectory. Following a disastrous conclusion to the previous week, Monday's trading session also concluded in the red for the local capital market. The Hang Seng Index, which encompasses 33 of the largest publicly traded companies listed on the Hong Kong Stock Exchange, recorded over a 2% decline on Monday (January 22, 2024) marking the first instance since October 2022 of closing below the 15,000-point threshold.
Notably, the Hong Kong blue-chip index had not been at this level since mid-1997, underscoring the current weakness of the primary index of the Hong Kong Stock Exchange.
The CSI 100 index, representing the 100 largest companies from the Shanghai and Shenzhen stock exchanges, also concluded Monday's session with a 1.3% decline, reaching its lowest levels since August 2016.
The two prominent Chinese stock indices have had a lackluster start to the year, with the Hang Seng losing nearly 11% since the beginning of January, and CSI 100 down over 4.5%. This marks the most challenging beginning to a year for the Chinese stock market since 2016.
However, this is not the only cause for concern. The Hang Seng Index ended 2023 with an almost 13% loss, sustaining continuous declines since the onset of the pandemic in 2020. Over the last five years, its value has plummeted by over 45%, transitioning from just below 28,000 points to the current levels below 15,000 points.
The MSCI China Index, serving as a benchmark for the most popular ETFs in this market, has already incurred a loss exceeding 10% since the commencement of the year. This significant lag is notable when compared to the MSCI ACWI Index (-0.1% YTD), encompassing the largest companies globally. Additionally, the gap widens when comparing it to the index of the largest U.S. companies, the S&P500, which has gained 1.5% since the year's outset, recently establishing new historical highs after experiencing over a 24% growth in 2023.
According to analysts at Swiss bank UBS, the current predicament of the Chinese market may present an investment opportunity. The present level of the Forward P/E ratio (price to forecasted earnings) for Chinese stocks is slightly above 8, representing the lowest figure in a decade.
Intriguingly, UBS analysts pointed out that historical data from the MSCI China index indicates that when investors acquired stocks at such a low FP/E ratio, their average return was 12% within a week!
UBS analysts also contend that, despite macroeconomic readings falling below expectations (GDP growth of 5.2% in 2023), the Chinese stock market's robust downward trend is primarily due to negative investor sentiment rather than the state of the Chinese economy. Furthermore, when examining the Chinese commodity market, government bonds, or commodities, it appears that investors in the stock market are adopting a notably more pessimistic approach to its valuation.
In conclusion, analysts argue that the combination of current attractive multiples,
underweighting by institutional investors, and potential government support renders the Chinese stock market increasingly promising. It offers an attractive risk-return ratio that investors may find compelling in the current economic landscape.
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