21 NOVEMBER 2024
In recent years, mainland Chinese equities have become some of the cheapest around due to a variety of factors including weak economic growth, US/China trade tensions and outflows from international investors spooked by mounting political risks.
This has led to a significant compression in valuation multiples like those shown in the chart below with both the headline price/book (blue line) and price/sales (red line) ratios now trading around multi-decade lows.
Historically, Chinese equities have not stayed at such depressed multiples for extended periods, although some sort of catalyst is typically needed to trigger a re-rating.
We believe that catalyst arrived in late September when the Central Bank announced a raft of liquidity measures aimed at reviving the economy and the domestic stock market.
It remains early days, but it looks increasingly likely that Chinese stocks are in the foothills of a substantial “stimulus rally” that sees investor sentiment and share prices rebound on a more sustained basis.
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