MARKETS SPECTATOR: Long Chinese march

Solid fundamentals, cheap valuations and a significant recovery in economic growth should see Chinese equities forge ahead, in defiance of doomsayers.

It's now common knowledge that despite all the doom and gloom and fears of a hard landing, the Chinese economy is showing very strong signs of recovery.

Ever since the GFC, Chinese equity markets have underperformed considerably as investors shied away from anything that resembled risk. Mind you, there were some underlying issues that included a major credit bubble, demanding valuations and a slowing economy.

However, as is frequently the case the investment community simply became too bearish and subsequently priced Chinese assets for a doomsday scenario. Surprise surprise, that never played out and the first signs of ‘less bad’ economic data in September last year saw the Shanghai Composite index begin to take off.

While the major indices and ETFs have rallied strongly already, fundamentally there is still a strong case for an allocation towards China-facing investments.

Valuations fell to some of the lowest levels seen. Currently, despite the strong gains seen over the last eight months the price to sales ratio for the Shanghai Stock Exchange is under 1 times, which is the same level that preceded the last two bull markets, including the massive rally that begun in 2006.

In my mind, there is no doubting the long-term growth potential of China. It is going to be one of the most important countries, if not the most important, in the 21st century.

It’s going to see an enormous amount of growth yet at the same time, investors need to understand that it’s not going to happen overnight nor is it going to be a smooth ride all the time. Like any country going through such changes, there will be peaks and troughs along the way, which are all part of a bigger growth cycle.

In my mind, the combined factors of solid underlying fundamentals, cheap valuations, contained inflation and credit risk and a significant recovery in economic growth rates should see Chinese equities continue their march higher.

For those who have yet to invest, we’re seeing a textbook trading pullback in the biggest China-facing ETF, the iShares FTSE China 25 Index Fund (FXI).

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Source: Iress

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