China’s cheap and happy

The Chinese stock market isn't as expensive as it was, says Merryn Somerset Webb. Now could be the time for a speculative punt.

The US economic recovery isn't perfect and it may not be long-term either. As Bill Bonner points out, a large part of the improvement in the statistics simply involves Americans heading back to the economic structures that have served them so badly for so long. Borrow, spend. Borrow, spend.

The same can be said for the UK see Matthew Lynn for more on this. But that hasn't stopped the bulls extrapolating it forever and making a case for a new secular bull market in America. We'd like to believe this (we have huge faith in new technology) and we are happy to be convinced on the growth bit. But we can't quite see ourselves coming round to the secular bull market bit.

Why? Price. Look at the cyclically adjusted p/e ratio (Cape) of well over 20 times (the long-term median is around 15) and the US looks both horribly overvalued and more expensive than almost any other global market. You can make some arguments that it isn't a bubble, but they all seem a bit contrived. As we pointed out last week when we looked at the backlash against the Cape, when people start finding ways to undermine traditional valuation techniques, it is a pretty sure sign a bubble is building. So we aren't mad for US stocks at the moment.

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Instead, we are looking around for places that offer us cheap-ish stocks and that might deliver positive surprises. Regular readers will know our current favourites. I like Russia and John likes Italy. But there is one market we never suggest to you. China.

We have long avoided the Chinese stock market. We used to avoid it because it was expensive. Then we avoided it because we rather think it isn't a real market. As China hasn't quite got to grips with the rule of law and property rights, we figure that buying equities there doesn't give you quite the same confidence of ownership as you might get elsewhere. Finally, we have been avoiding it because people keep telling us not to. While we have been bearish on China, most other people have been bullish. Too bullish. For them, all the surprises of the last few months have been negative.

But now we are beginning to wonder. We are still worried about a blow-up in China, and still expect growth to slow. It also still isn't what you might call a real stock market. But it isn't expensive anymore. On a Cape of around 12 times, you could just about call it reasonable. There is also scope for positive surprises.

China is an export machine. So if things are looking up in America, Britain and Europe, albeit temporarily, things should look up for China's exporters too. And if you add cheap to happy, you tend to get a rising market. China is very risky, so this isn't one to take more than a punt on, but if you want a little speculative exposure to China, you could buy it now.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.