Investors are fleeing China – is it time to buy?

Money is pouring out of China right now.

A BoA Merrill-Lynch survey shows that between December and January, institutional investors dumped Chinese equities in a hurry. The survey shows a swing from net 15% ‘overweight’ to net 14% ‘underweight’. At the same time, growth expectations in China fell to the lowest level in five months.

In general, economic data coming out of China barely meets market estimates, but we all know focusing on China’s statistics is a mugs’ game. If you want to make money from this market, you need to look at other factors.

This is not a fundamental change of heart, as I remain concerned about long-term problems in China.

Sentiment towards China is at rock bottom, and when I see that, I perk up. I believe China could make an interesting short-term trade at the moment.

China is cheap for now

Because no one wants to go near China right now, stocks are very cheap. The Chinese market is trading on a price to earnings of 5.6 times and 0.9 times price to book for the 2014 fiscal year, which is close to a record low.

And what’s more, by this time next month, China could look a whole lot different.

On 5 March, the National People’s Congress (NPC) will convene, which may give the market an update on the long-term structural changes and targets that China’s new leadership is trying to implement. It could contain details on economic growth, money supply targets and a more detailed roadmap of reform implementation.

BNP Paribas expects reforms in local government finances, the financial sector and land to be gradually implemented through the year. This area is the most important aspect of the China story, but which requires considerable investment resulting in fatigue among many investors. However, historically, these kinds of events have led to substantial rallies.

37% in five months?

Obviously, this comes with risks. China as whole is not a ‘buy and hold’ market, but it does offer regular generous opportunities to make money if you time it right. And if the market is ready to bounce, it could result in strong returns.

So how to play this?

At the moment, most of the long-term money is parked, in descending order, in the following sectors: IT, telecoms, consumer discretionary, consumer staples and energy. Hence, most stocks in these sectors are over-owned and come with steep multiples.

Instead, what tend to do well are diversified financials, construction materials, real estate and banks. Other stocks that are out of favour include high beta and those more closely linked to the domestic economy.

Another way to play is the Hang Seng China Composite Index (H-shares) – constituting arguably the best companies as they act as the shop window of modern China listed in Hong Kong.

BoA Merrill Lynch found that after the global financial crisis in 2008 and the peak of HSCEI index in November 2010, the market experienced three big rallies lasting on average five months and yielded 37%. That magnitude is supported by the fact the HSCEI index is currently trading at a 28% discount to its five-year average.

There are reasons to be worried about China, but that doesn’t mean it’s not cheap. I think we could be looking at double-digit gains here, in a short period of time.

  • Rookie

    Hi Lars, I have just read your article: China is growing its military – investors, pay attention via The New World email update.

    Good article… but it mentions nothing about taking advantage of the fact China will be growing it’s military…. How can we get exposure to this? For example will BAE Systems benefit from this? Or is there another company who will benefit from this?

  • Graham G

    I am an inexperienced trader, currently using iWeb sharetradiing to buy and sell. I want to buy some Chinese shares listed on the Hong Kong market bit iWeb doesn’t allow access to that. I have been looking at other share trading portals but am finding it difficult to identify one that supports the HK market. Anyone got any suggestions? I am used to paying £5.95 a trade and am pathologically mean 🙂


Claim 12 issues of MoneyWeek (plus much more) for just £12!

Let MoneyWeek show you how to profit, whatever the outcome of the upcoming general election.

Start your no-obligation trial today and get up to speed on:

  • The latest shifts in the economy…
  • The ongoing Brexit negotiations…
  • The new tax rules…
  • Trump’s protectionist policies…

Plus lots more.

We’ll show you what it all means for your money.

Plus, the moment you begin your trial, we’ll rush you over THREE free investment reports:

‘How to escape the most hated tax in Britain’: Inheritance tax hits many unsuspecting families. Our report tells how to pass on up to £2m of your money to your family without the taxman getting a look in.

‘How to profit from a Trump presidency’: The election of Donald Trump was a watershed moment for the US economy. This report details the sectors our analysts think will boom from Trump’s premiership, and gives specific investments you can buy to profit.

‘Best shares to watch in 2017’: Includes the transcript from our roundtable panel of investment professionals – and 12 tips they’re currently tipping. The report also analyses key assets, including property, oil and the countries whose stock markets currently offer the most value.