Yes, There Really Is a Bull Case For Investing in China's Market.

"Given the endless bad news about China's economy, the contrarian in me wants to be bullish.

It's true that debt, housing, local government and consumer demand are all a mess, and dire demographics raise the prospect of a Japanese-style economic disaster. But there are three things working in China's favor as an investment destination: Stocks rarely have been this cheap compared with the U.S.; its entire weight in a global benchmark is smaller than Apple's; and a weaker dollar might help.

The basic case is that China is cheap. MSCI China, which includes Hong Kong stocks, trades at just 10.8 times the next 12 months' earnings, about half the 20 times earnings of both the S&P 500 and MSCI USA. Even that hides the cheapness of much of the market, as Tencent Holdings makes up more than 12% of the index and trades at 17.5 times forward earnings.

Of course, China is cheap for a reason. The property-market implosion has exposed the underlying weakness of the economy, while frigid relations with the U.S. have scared off Western investors. The risk of being in a Communist dictatorship has become all too clear, with the arbitrary decision to shut the private education industry, the crackdown on China's big tech companies and the capricious response to Covid-19.

The question is: How cheap should China be? Past evidence suggests it can get much cheaper in a crisis. In the 2008-09 financial crisis, China traded at 6.6 times forward earnings, and was below 10 for most of the time from 2011 to 2015. It is also one of the few countries whose history includes a thriving stock market that went to zero, after the Communist revolution in 1949.

Yet China is remarkably cheap compared with the U.S. The gap between the U.S. and China valuations has been this wide only briefly in 2020 and 2021, according to MSCI data starting in 2003.

It isn't only that China is cheap. As an emerging market, it ought to benefit if the dollar begins to weaken. Aside from anything else, a weaker dollar would help China defend the yuan, as it has been trying to do.

"There's a strong case to be made that the dollar has peaked and already started to decline," argues Gustavo Medeiros, head of research at Ashmore Group. "When the dollar weakens, it typically becomes a virtuous circle of inflows and lending" to emerging markets.

Certainly, the dollar became historically strong. It peaked in trade-weighted terms, adjusted for inflation, last October at its strongest level since the 1980s. It has since weakened about 6% as the Federal Reserve moved from aggressive rate increases to a more balanced approach, and inflation in much of the developed world became a bigger problem than in the U.S.

I prefer investments to be cheap in absolute terms, not merely relative to alternatives. And the bull case applies to other investments, too. The U.S. market is very expensive, and makes everywhere else look cheap by comparison -- with the U.K. at about 10 times forward earnings.

But the prospect of a weaker dollar wouldn't particularly help other developed markets, except in pure currency gain terms. Emerging markets, however, usually benefit much more when the dollar falls. Compared with the rest of the emerging-market universe, China is about as cheap as it has ever been.

Some investors might still balk at the political and geopolitical risks of China, particularly regarding Taiwan. That's perfectly reasonable. But there is a contradiction here: Apple gets one-fifth of its sales from China, has a large manufacturing base in the country and is bigger in the MSCI All Country World Index global benchmark than China.

Investors choosing to steer clear of China because of the political risks at least ought to worry about Apple, the world's most-valuable company and a very expensive one, at 29 times forward earnings.

Contrarians looking for ways to avoid the richly priced U.S. market might have passed over China because of the constant flow of bad news. But the point of being a contrarian is to venture to places that others shun; it has plenty of risks, but they are at least starting to be priced in. I would prefer it to be cheaper still before buying, but who wouldn't?" [1]

1. Streetwise: Yes, There Really Is a Bull Case For Investing in China's Market. Mackintosh, James. 
Wall Street Journal, Eastern edition; New York, N.Y.. 06 Sep 2023: B.1.