China stocks: relatively attractive notwithstanding short-term volatility

Chinese equities have underperformed in yoy terms most of other stock markets due to the strict Zero-covid policy. Currently, they look relatively attractive on valuation ground. Market multiples trade at a discount of 18 pp relative to the MSCI World.

We come to the same conclusion, adjusting PE by long-term earnings growth and COE/ROE, which signals the ability to produce a return on capital higher than the cost of it. Such China adj. PEG of 1.4 looks  attractive compared to ca. 1.6 of the US and EMU and 1.65 for the MSCI EM.

Going forward, Chinese equities are to benefit from increasing government’s policy support, easing lockdowns and increased signs of easing tech regulation as well as rebounding credit impulse. While developed stock markets are suffering from deteriorating financial conditions and high inflation, Chinese monetary support is instead increasing and inflation remains contained.

The global economy is expected to contract next year, while China's economy is forecast to grow at 5.5% vs 3.2% in 2022.

Short term, China still faces ongoing risks from Covid, the real estate sector and a slowing global economy, which would contribute to increased volatility in the short term. Geopolitical tensions represent another source of risk also for the mid term.