Valuation levels for Chinese stocks are attractive, says Kinger Lau
We were just talking about some of the outperformance of some of these Chinese indices. When it comes to the S&P, you actually believe that Chinese equities, they’re actually undervalued and they have a big upside left to go. I want to go with what you call your blue sky case. What is your blue skies case for the rest of this year when it comes to the Chinese markets? Do you see tech continuing this level out of outperformance? Yes. So Frank, as you said, over the past three months, China, China equities have been the best performing equity markets globally, up about 24% since the through end of at the end of January. So looking ahead, even after the 24% recovery, the valuation levels remain quite attractive in our view. So at the moment, our benchmark MSL China is trading on 10 times forward earnings, which is still about 1 standard deviation below the past five year averages. And looking ahead, I think one of the very positive and potentially very powerful catalyst in our view would be the corporate governance reform in China. So just a few weeks ago the State Council unveiled the once a decade of kind of development plan for the domestic capital markets AKA to 9 measures. And on our estimate if China can match global leaders in terms of shareholder returns, in terms of corporate governance standards as well as long term shareholding structure improvement. We think that that’s why you know blue sky scenario, we think that the potential valuation upside could be as high as 40%. Well really that’s what I want to ask you about your your blue, your blue sky scenario, even your base case, they both kind of depend on three things that Chinese companies can match global leaders on shareholder returns that’s price appreciation and dividends. I would assume corporate governor standards, corporate governance standards, they have to meet other companies on that and then also maintain long term investor ownership. The last two specifically have been historical challenges. You mentioned some of the government reform. What else has meaningfully changed? I’ve got a few things. Number one, we have a new CSRC Chairman just got appointed 3 months ago in China. So I think his mandate is very clear. He wants to increase the quality of listed companies in China. And #2, I think the disciplinary mechanism and the listing mechanisms have also changed in China. And I think if the right policies are in place, I think the upside scenario can materialize from here. All right. So a week ago today, you saw, you say your data shows actually that we saw the biggest one day of inflow into Chinese equities, $3.1 billion. At the same time, we’re hearing from some big banks that seem to make your take a bit contrarian. So just in the last week alone, this is just over the last week we’ve heard from Morgan Stanley and Citi both see the momentum behind the recent China rally fading and they’re actually citing weak fundamentals and overbought signals. As you’re looking at a day of the biggest inflows, they’re seeing it as overbought. Well, first of all, we think actually fundamentals are improving some Ward, especially from a macro perspective. Obviously first quarter GDP came in better than expected. On top of that, from a profit or from an earnings standpoint, we have started to see some earnings upward divisions particularly in the big TMT Internet companies. So I think that the recent recovery obviously has been triggered by policy expectation, but at the same time we’ve seen some fundamental bottom up support to the Roddy.