China looks undervalued based on its fundamentals. When you view Chinese stocks from the value perspective, they look cheap relative to other emerging markets and the broader market.
Market Realist – The graph above shows the price-to-earnings ratio (or P/E ratio) for China (FXI), emerging markets (EEM), and the world (QWLD). The Shanghai Composite Index tracks Chinese stocks. It’s the cheapest. It’s trading at 11.8x. This is slightly cheaper than the MSCI Emerging Market Index. It’s trading at 12.3x. In contrast, the MSCI World Index—which tracks global stocks—is trading at 17.7x. It’s richer than the other two.
At these valuations, Chinese equities look like a good long-term value considering that it’s still growing faster than developed countries and other EM countries, including the rest of the BRIC countries. In addition, even if China’s growth slows to below the government’s current annual target of 7.5%, say to about 6%, this would still be a multiple of growth anywhere in the developed world.
Market Realist – The graph above compares the gross domestic product (or GDP) growth rates in the BRIC nations. The BRIC nations include Brazil (EWZ), Russia (or RSX), India (EPI), and China. They’re the biggest economies within emerging markets. As you can clearly see, China’s GDP growth rate is by far the fastest compared to the other BRIC nations over the last four years.
Considering the valuation argument, now could be a good entry point into Chinese stocks if you have a longer-term horizon.