Saga of Financial Markets


Last updateSat, 29 Jul 2017 12am

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China is cheaper than Turkey!

The resent relatively indiscriminate selloff in emerging markets, made China’s shares cheaper than Turkey and Argentina.  With an estimated 2014 P/E (price-to-earnings ratio) of 8.1, China is the cheapest major market in the world on a forward-looking P/E basis!  MSCI Emerging Markets Index’s P/E is about 10.

Does the fundamental of China support its ‘cheap’ valuation?  Absolutely not.  Here is why:

  1. China’s industrial profits is growing at a robust 12.2% year-on-year.
  2. Unlike most emerging market, where their economies are commodity driven which is now suffering in the deflationary headwinds, China’s should benefits from lower raw material prices.
  3. China’s RMB has been among the most stable emerging market currencies in the past few weeks and it is likely to remain stable this year.  From December 1 to February 5, RMB gained 0.5% against the US$ while Turkey’s lira shed 8.6% and Argentina’s peso fell 22%.
  4. China has forex of more than US$ 3 tn!

So what is pulling back China?  They said it is the concern of bad debt in its banking system.  To be more precise, the private sector credit in China has grown more rapidly than it is unlikely to carry on further with its credit growth.  As credit growth slow, it would likely mean that the economy will slow.  Apparently, there is a disconnection between China’s strong fundamental and its market valuation.  Based on the China’s fundamental, it is not logical for China to be cheaper than Turkey.

Reference, Leslie Shaffer, 2014-02-10, “China is Now Cheaper than Turkey”