ORLANDO, Florida, Nov 10 (Reuters) – For long-term investors, the famous ‘tortoise and the hare’ fable is a useful reminder that the stock, sector or country racing ahead today may not be the winner tomorrow.
This has been true of the performance of Chinese stocks vis-à-vis Wall Street at nearly every juncture over the past 30 years, perhaps surprisingly, given China’s surge to global economic and financial powerhouse status in that time.
With economic, trade, and geopolitical relations between the two superpowers at their lowest ebb in decades, investors are more attuned than ever to the risks of putting their money in China for the long term.
Few fund managers with a global mandate will not have Chinese assets in their portfolio, however, such is China’s size and importance. This has been the case for years and is unlikely to change.
But presence does not guarantee performance.
If that has been true over periods comprising China’s boom years of double-digit annual growth, how will relative returns pan out when growth converges ever closer to U.S. levels in the coming years and decades?
On most long-term comparisons with the Shanghai Composite going back 30 years, or with the blue chip CSI300 index since its launch in December 2004, the S&P 500 has outperformed Chinese stocks, in nominal price and total return terms.
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By curious chance, if you had invested one dollar in the S&P 500 and one yuan in the CSI 300 on the day of its launch nearly 19 years ago, your accumulated nominal return would be almost identical today at around 260%.
It’s a similar story when comparing total returns, in their respective currencies, over the same period, with the S&P 500’s accumulated 425% gain just edging out the 400% rise chalked up by the CSI 300.
If both are calculated in dollar terms, however, Chinese stocks have, by some measures, carried an advantage over the very long term. That said, the MSCI U.S. index has just overtaken the MSCI China index of onshore A shares.
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Looking into the 10- and five-year rear-view mirrors, Wall Street’s total returns have outpaced China by some distance, when measured both in domestic currencies and in dollar terms.
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GOING CHEAP
Whether you’re a China bull or bear, it is highly likely that the gap between Chinese and U.S. economic growth over next 20 years will be smaller than it was in the last 20.
The years of double-digit annual growth in China are gone – Goldman Sachs expects it will slow to 3% by 2034 and Morgan Stanley says a ‘debt-deflation scenario’ could slow nominal GDP growth to just 1.7% by 2027, even lower in dollar terms.
Many observers say demographics, deleveraging, and de-risking – U.S. firms on-shoring, new supply chains, and trade tensions – will be a considerable long-term drag on Chinese growth.
“I’m outright bearish on China, including Chinese asset prices,” says Torsten Slok, chief economist and partner at Apollo Global Management. “The golden era for China is over.”
For the first time in over 20 years, the U.S. is now importing more from Mexico than it is from China, and for the first time since official Chinese records began in 1998, China just recorded its first-ever quarterly deficit in foreign direct investment.
This is the backdrop to high-level talks between U.S. Treasury Secretary Janet Yellen and Chinese Vice Premier He Lifeng to try an maintain economic ties between the superpowers despite the tense relationship overall.
Little wonder, perhaps, that Chinese stocks are so cheap. China bears like Slok would say for good reason, optimists would say the upside potential is huge.
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Based on 12-month forward price/earnings multiples, U.S. stocks are twice as expensive as Chinese stocks. For the past 10 years Chinese stocks have been substantially cheaper than U.S. stocks, and most of the decade before that they were usually cheaper too.
But the gap has rarely been this wide, and a growing number of investors and money managers are looking more favorably upon them.
Colin Graham, head of multi-asset strategies at Robeco, is one. He reckons the ultra-cheap valuations reflect an outlook for the Chinese economy – the second largest in the world and still growing solidly – that is simply too gloomy.
“There are reasons to be optimistic. Fiscal stimulus is more targeted now – it’s not ‘big bang’ stuff, and should lay a stronger foundation for the next cycle,” Graham says.
(The opinions expressed here are those of the author, a columnist for Reuters.)
By Jamie McGeever; Editing by Andrea Ricci
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
