🇨🇳 Is China Investment-Worthy?

Welcome to this week’s Altsights!

Table of Contents

• A Little Chinese History 📕

• 4 Reasons to Be Bullish on China 📈

  • $500 Billion Stimulus Package 🩼

  • The Largest Consumer Base in The World 🍔

  • The New Innovation Capital of The World 🧪

  • A Value Investment Opportunity 💎

• 3 Reasons to Be Bearish on China 🐻

  • Not Fully Capitalistic 🔨⛏️

  • Deflation and Debt 😐

  • Weakening Demographics 👴🏼

• How To Invest in China 🇨🇳 from India 🇮🇳

  • Disclaimer

A Little Chinese History 📕

This is how China’s Shanghai Composite Index has performed over the last 2+ decades:

Compare this to India’s NIFTY 50:

Now, you may wonder why are we even discussing China if India has outperformed China so comprehensively.

I’d say this is the exact reason why it is important to discuss China.

China is like a beaten-down value stock that’s been out of favour for a while now.

Moreover, it is one of the few markets that offers diversification beyond India and the US.

4 Reasons to Be Bullish on China 📈

$500 Billion Stimulus Package 🩼

The Chinese economy has been struggling for some time. This has reflected in the performance of Chinese stocks and gold becoming China’s preferred investment asset.

But earlier this week, a whopping $500 billion stimulus package was announced to support the economy and the markets.

Additionally, interest rates and mortgage rates were cut to boost credit and revive consumption.

This stimulus has injected fresh enthusiasm into the Chinese economy and stock markets. This was evident in the jump we saw in Chinese stocks:

The Largest Consumer Base in The World 🍔

Yes, India did overtake China in terms of population a few months ago but we are nowhere close to the consumption patterns of the Chinese.

A consumer is someone who spends at least $12 or ₹1,000 per day. There are almost a billion consumers who help keep China’s economy alive and kicking.

The New Innovation Capital of The World 🧪

Everyone knows about the manufacturing prowess of China and its copycat reputation.

But while we have been mocking China-made products, the country has outpaced everyone else when it comes to innovation.

The Red Dragon ranks as the 11th most innovative economy on the Global Innovation Index - the only middle-income country in the top 30.

China’s capital, Beijing, is the 4th most innovative city in the world.

China is home to 26 of the world’s top 100 science and technology clusters in the world.

I could go on and on to prove that China is at least on the path to becoming the next innovation capital of the world.

A Value Investment Opportunity 💎

Value investing refers to investing in stocks that are trading lower than their fair value.

But how do you define fair value?

One way to do this is to compare the PE (price-to-earnings) ratio of a stock with its industry peers.

So, to identify whether HDFC Bank is overvalued or undervalued, we can compare its PE ratio with other banks like SBI, ICICI, Kotak Mahindra etc. If the PE ratio of HDFC Bank is lower, then it is undervalued.

We can do the same for China by comparing its PE ratio to other countries. Here’s what this looks like:

Another way to confirm that China is a value investment opportunity is to compare China’s present PE ratio with its historical PE ratio:

As you can see, China’s present PE ratio is much lower than what it was in 2017, 2018 and 2021 and other shorter periods in the last 10 years.

3 Reasons to Be Bearish on China 🐻

Not Fully Capitalistic 🔨⛏️

Many of the largest Chinese companies are state-owned. Their interests are aligned more aligned with the Chinese state than the company shareholders.

This has been a dealbreaker for many foreign investors since I can remember.

Deflation and Debt 😐

The debt levels across the Chinese governments and private consumers are very high.

Debt stifles consumption. You cannot go around spending lavishly if you have to repay your debt. So, the higher the debt, the lower your consumption.

The deflation-debt problem is very hard to solve and has been affecting countries like Japan and a few European economies for sometime now.

The $500 billion stimulus and rate cuts announced earlier this week are steps in this direction.

Weakening Demographics 👴🏼

A large young and working population is crucial for economic growth. 

You may have heard that India has a ‘demographic dividend.’ It refers to the large and growing population of people in the working age who can produce value and contribute to economic growth.

However, China’s population is ageing.

By 2035, ~400 million or 30% of China’s population will be over retirement age.

How To Invest in China 🇨🇳 from India 🇮🇳

Mutual funds are the way to go.

Here are a couple of funds (not recommendations) that can get you access to Chinese stocks:

1. Edelweiss Greater China Off-Shore Fund
   A feeder fund that invests in the master fund of JPMorgan Funds - Greater China Fund, an actively managed fund that invests in stocks listed in China, Taiwan and Hong Kong (together referred to as Greater China).
   
   The fund primarily invests in large cap stocks and has a blended (growth + value) investment style.
   

2. Mirae Asset Hang Seng Tech ETF or FoF
   A passive ETF which gives you exposure to 30 of the largest tech stocks in mainland China.
   
   You can either invest in the ETF via a demat account or its FoF which doesn’t need a demat account.

Disclaimer

This is neither a research report nor a recommendation to invest in China via mutual funds or otherwise.

All I try to do every week is offer investing insights that you may not find elsewhere. I think China is an intriguing investment opportunity and have attempted to present it.

See you next week!

Cheers,
Madhu,
Founder, Altcase