I’ve been looking at Chinese indices after a social media post pointed out that the Chinese CSI 300 index (CSI300) was at 12-month lows. At the same time, US indices were just off record highs.
The simple response is that China is cheap, and many people have been making that point for some time. For years, in many cases.
However, cheap is always subjective. In the case of the CSI300, its trailing earnings multiple is merely trading back at its longer-term average. So, no, it’s not cheap; it’s just back at average.
This leads us to ask: cheap relative to what? Relative to its trailing valuation, it is not cheap. Relative to US valuations, it is wildly cheap. But is this a fair comparison? I would say no, for many reasons we all understand.
What matters is whether it is cheap relative to what else we could do with our money. This is something I, and probably many other investors, often miss. We have a finite amount of money and need to make decisions about what to buy. We can’t rush off and buy everything. At the same time, being caught in a “cheap” investment could result in years of no return while around us everything is making fantastic returns. No-one wants to land in a value trap.
What matters is what changes that cheap narrative. Why do investors suddenly decide to buy the cheap whatever you’ve just bought, sending it higher?
This has long been an issue I try to keep an eye on, especially in the local small-cap sector. We have a lot of very cheap listed small- and medium-sized stocks, but most of them have been cheap for years, often decades.
Sure some, like Argent (see Top Spin), wake up and make 10 times the money in a little over six years. But most don’t.
Argent adopted a very clear strategy that the market caught onto in 2020 when CEO Treve Hendry stated the company was going offshore because operating a business in the UK was easier than in South Africa. It also halted dividends for a few years to buy back its cheap shares. This plan had been in place since 2018, but the August 2020 results drove it home and caught the market’s attention.
This strategy could have failed, but there was a clear catalyst for investors to jump into Argent.
In the case of China, what’s the catalyst there? I watch the China newly built house prices year-on-year change. Since April 2022, it has been negative every month except March 2023. Continually falling house prices will depress Chinese consumers (literally and figuratively) and hence depress their spending. Yes, growth and inflation also matter. But this indicator goes to the heart of a consumer-driven economy, which is what China is moving towards.
So, while there are hundreds of Chinese data points you could watch, this is mine. Sustained positive moves here would see me becoming interested in “cheap” China.
Until then, it’s cheap, but so is a lot else. I need a catalyst.
