According to Goldman Sachs Asset Management, because of decline in equity valuations and as corporate profit growth is poised to level out; Chinese stocks have now become more attractive than ever. According to the Head of Greater China Equity of the lender, Alina Chiew, Chinese stocks are currently at the trough when it comes to the earnings and valuation cycle. Alina added that current scenario has made it’s an interest time to start investing in Chinese shares.
Incidentally, the Hang Seng China Enterprises Index which tracks all the stocks trading in Hong Kong, declined by 8.8% in this year. However, the member company earnings increased by 1.2% in the last 3 months ending on March, marking its first ever uptick since last June. On the other hand, the CH55BN index of the 55 Chinese stocks trading in US has declined to 12 times of the estimated earnings, this is 50% less than the valuation that was done in last year’s March. Chew added that from around 20% to 30%, the profit growth is expected to retreat to around 15% to 20%. Incidentally, on today, the Hang Seng China gauged increased by 1.2%. On the other hand, the benchmark stock gauge for the domestic Chinese stocks, the Shanghai Composite Index gained 0.3% as well.
In this month, the Shanghai gauge has declined by around 2.1% as the Government reported that the economic growth has slumped to 7.7% in the first quarter of this year. Incidentally, during the last 3 months of 2012, the gauge rose by 7.9%. Quarterly expansion is also down from as high as 12.4% in 2006, before the global financial crisis occurred.
Chiew continued that the market should be weaning itself off expectations of a double digit growth out of the Asian country. Investors should be adjusting the fair valuation that they are thinking of paying. At this point of time, the key to invest in China is being able to ride out the cycle on medium term basis and just forget the bumpy ride to be experienced in between. She added that as the Chinese Government has decided to reorient country’s economy away from investment and exports, towards domestic consumption, the raw material producers may get affected negatively. From a valuation as high as 33 in September, 2007, the Shanghai Composite currently trades at 9 times of the estimated earnings.