The MSCI China index has lagged developed stock markets by 19% over the past two years and by 10% over the last five, even after its recent rally and the strengthening renminbi are taken into account.
Despite this, Gardiner, Barclay’s head of investment strategy for Europe, the Middle East and Africa, refuted speculation that China is just “another over-hyped emerging market”.
“China’s ongoing liberalisation and economic growth remains one of our favourite long-term investment themes,” he said.
“While it can be played profitably indirectly – through the shares and bonds of companies quoted elsewhere whose businesses are influenced by China – we think some direct holdings in the market should be in most long-term investment portfolios.”
Gardiner conceded that a degree of hype can be found in the China investment story. The rapid GDP seen in the world’s second largest economy does not guarantee good returns, for example, while the state’s controlling stake in most quoted companies has created an overhang that contributes to falling prices in the main onshore market.
However, the commentator highlighted a number of strengths that offset these negatives.
MSCI China has performed better than the Bric group as a whole, which is completed by Brazil, India and Russia and has lagged develop markets by 17% in common currency terms over five years. Gardiner attributed this to China’s stronger currency and cited currency appreciation as one of the country’s structural strengths.
The index currently has a “plausible” single-digit prospective price/earnings ratio, he added, which is significantly below its own ten-year history and that being seen in the rest of emerging Asia.
Meanwhile, China’s structural growth rate of between 7 and 8% “must at least help” even if it does not always translate into returns. This is supported by the government’s pledged commitment to economic reform and liberalisation.
Additionally, the country’s currency reserves of about $3trn and its current account surplus suggest a degree of financial stability, the commentator said.
“We would not recommend playing the long-term China theme through Chinese stocks only,” Gardiner concluded.
“Asia generally is our preferred emerging market bloc and markets such as South Korea and Taiwan offer some exposure to China’s growth – as, of course, do many Western companies (which look equally inexpensive). But MSCI China looks relatively attractive as we enter 2013.”
