China: my super-sized contrarian bet for 2014

A push for reform in China will give a huge boost to stocks, says David C Stevenson.

It's been a long time coming, but Chinese equities might finally be on the move. Although I'd still be a little cautious on the risks, as we enter 2014, I'd contend that China is now the super-sized contrarian bet for next year. Valuations remain very low in terms of local share prices, with Chinese shares generally trading at eight times 2013 earnings estimates, and yielding about 4% on 2014 numbers. But investors are starting to pay attention, and that could send prices a lot higher. People have already stopped yanking money out of China exchange-traded funds (ETFs) $1.2bn has been poured into the sector in just a few months.

A large chunk of this (mainly Western) money comes in the wake of local stockmarket advances. The Shanghai Composite Index of local shares rose 3.7% in November, the biggest monthly gain since August. This upsurge is due in part to growing domestic business confidence just a few days ago the November Chinese Manufacturing Purchasing Managers' Index (PMI) came in at 51.4, suggesting fairly robust expansion. But what's really helped is a shift in sentiment among Western investors. Suddenly China is no longer the dog everyone thought it was. As we discussed in last week's cover story, this change of heart has a lot to do with the recent Communist Party plenum, which outlined an incremental but extensive series of reforms, and stamped President Xi Jinping's authority over the party.

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Amundi ETF MSCI China UCITS ETFLSE: CC12.83%0.55%GBP
db x-trackers CSI300 Index UCITS ETFLSE: XCHA-3.54%0.5%USD
db x-trackers FTSE China 25 UCITS ETFLSE: XX25-7.06%0.6%GBP
db x-trackers MSCI China TRN Index UCITS ETFLSE: XCX65.69%0.35%GBP
HSBC MSCI China UCITS ETFLSE: HMCH3.79%0.6%GBP
iShares China Large Cap UCITS ETFLSE: FXC-8.48%0.74%GBP
Lyxor UCITS ETF China EnterpriseLSE: ASIL1.93%0.65%GBP
Source MSCI China ETFLSE: MXC56.2%0.95%USD
*Total expense ratio (annual management and other fees). Source: Morningstar, 25/11/13
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Matthews Asia Funds China Small Companies29.24%USD
Invesco Perpetual Hong Kong & China28.33%GBX
Fidelity China Consumer26.26%GBX
Threadneedle China Opp Ret Net23.34%GBX
GAM Star China Equity23.15%USD
Ignis Intl China A21.21%GBP
Jupiter China20.31%GBX
Invesco PRC Equity C19.95%USD
Henderson China Opportunities18.73%GBX
Neptune China Special Situations18.21%GBP
(Source: Morningstar, 25/11/13)
David C. Stevenson
Contributor

David Stevenson has been writing the Financial Times Adventurous Investor column for nearly 15 years and is also a regular columnist for Citywire. He writes his own widely read Adventurous Investor SubStack newsletter at davidstevenson.substack.com

David has also had a successful career as a media entrepreneur setting up the big European fintech news and event outfit www.altfi.com as well as www.etfstream.com in the asset management space. 

Before that, he was a founding partner in the Rocket Science Group, a successful corporate comms business. 

David has also written a number of books on investing, funds, ETFs, and stock picking and is currently a non-executive director on a number of stockmarket-listed funds including Gresham House Energy Storage and the Aurora Investment Trust. 

In what remains of his spare time he is a presiding justice on the Southampton magistrates bench.