The 2015 GDP
growth for the U.S. is 2%, for China 6.9%, for Singapore 2.1%, for Hong Kong
2.4%. So, it is obvious that China is the happening place. But what about the valuation
of the stocks traded in respective bourses based on their average or collective
price-earnings ratios (p/e)?
The trailing
p/e of Dow Jones Industrial Average (DJIA) and S&P 500 is between 16x to 18x.
The trailing p/e of Shanghai Composite Index (SHCOMP) is 16.3x, for Straits
Times Index (STI) 12.1x, and for Hang Seng Index (HSI) about 10.4x.
SHCOMP is
formed by all the stocks listed in the Shanghai Stock Exchange. These include about
1000 stocks and many bonds and other instruments. For HSI and STI, only 30 blue
chips are included.
If we take
only the blue chips listed in Shanghai Stock Exchange, the trailing p/e will
only be around 10.5x. So, I have identified that high GDP growth happens in
China and low p/e stocks are in Shanghai Stock Exchange. What else do you want?
However,
some of these blue chips are also dual-listed in the Hong Kong Stock Exchange.
Today, they are collectively around 31.9% cheaper than their counterparts
listed in the Shanghai Stock Exchange, i.e., the collective trailing p/e of China
blue chips listed in HK Exchange is only around 8x --- this is valuation at
crisis level by whatever yardstick you may adopt. That is why value investors
should place more emphasis on stocks listed in Hong Kong Stock Exchange.
Those
dual-listed stocks in the Shanghai Exchange or Shenzhen and denominated
in RMB are known as A-shares
and those in the HK Exchange H-shares.
Yes, H-shares
are what we should focus on. But what about the entry point? It is about now.
There are
other reasons why we have to seriously take a look at H-shares at this crucial
period.
1.
The
probability of getting A-shares blue chips to be included in MSCI Index in this
coming June is very high and this will boost the confidence of all market
players in the China bourse. The p/e of A-shares blue chips should rebound from
10.5x to 13x and that will mean SHCOMP should reach 3600.
2.
MSCI
index did not adopt A-shares blue-chips index in last June because of instability
of the RMB and market accessibility issues. Most of the problems have since
been largely resolved by the China Securities Regulatory Commission. Once
the A-shares are added, prices of both A-shares and H-shares are expected to
rise because many fund managers will have to buy them to add to their own funds
and all exchange-traded funds that track the MSCI index will be forced to add
those shares.
3.
The
Shenzhen and HK Connect will surely be rolled out before the end of this year. This
will increase market liquidity and brokerages and finance companies will
benefit the most.
What you
have to do is understand the H-shares and buy some of these gems before the
sharks smell the blood.
Superphang
Thank you for sharing such informative, useful and helpful knowledge! This gave me some insights to do better. I would really love to see more updates from you.
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DeleteIf we take only the blue chips listed in Shanghai Stock Exchange, the trailing p/e will only be around 10.5x. So, I have identified that high GDP growth happens in China and low p/e stocks are in Shanghai Stock Exchange. What else do you want?
However, some of these blue chips are also dual-listed in the Hong Kong Stock Exchange. Today, they are collectively around 31.9% cheaper than their counterparts listed in the Shanghai Stock Exchange, i.e., the collective trailing p/e of China blue chips listed in HK Exchange is only around 8x --- this is valuation at crisis level by whatever yardstick you may adopt. That is why value investors should place more emphasis on stocks listed in Hong Kong Stock Exchange.