China Wealth Eluding Foreigners as Equities Earn 1% for 20 Years – Bloomberg 07-14-13

Salient to Investors:

The MSCI China Index has gained 14 percent, including dividends, since July 1993 versus 452 percent for the S&P 500 Index, 322 percent for the MSCI Emerging Markets Index and 86 percent from US Treasuries. Only the MSCI Japan Index had a weaker performance among the 10 largest markets, losing 1 percent. China per-capita income grew to $6,076 as of 2012 from $517 in 1993. However, the MSCI China index gained 680 percent from Nov. 10, 2001 through the index’s peak during the stock-market bubble on Oct. 30, 2007.

Nicholas Yeo at Aberdeen Asset Mgmt proves that great GDP does not mean a great stock market, and says valuations must fall further before it buys. Yeo says the lack of quality of corporate governance is one reason why companies don’t perform well over the long-term, and profits in China are weaker in part because there’s too much competition – many players enter any sector that look interesting, resulting in profits being competed away. Earnings in the 137-stock MSCI China index have climbed about 5 percent during the past two years, versus 15 percent for the S&P 500.

Goldman Sachs and China Intl Capital Corp predicts GDP will expand 7.4 percent in 2013, which would be the weakest annual rate since 1990.

Gary Dugan at Coutts & Co. said China is sacrificing short-term economic growth as it seeks to make the nation’s long-term expansion more sustainable, in part by curbing credit – a cloud over stocks.

The MSCI China Index is at 9.3 times reported earnings, versus 16 times for the S&P 500 , the biggest discount since September 2003, and versus 11 times for the MSCI Emerging Markets index.

Marco Li at Manulife Asset Mgmt said sentiment is quite fragile on China.

Nader Naeimi at AMP Capital Investors said with the transition of growth towards consumers you would want companies that leverage consumer spending.

David Gaud at Edmond de Rothschild said China is one market if you buy a tracker or ETF, and you are very much at risk, but buying funds that are selective in their stock picking offers very solid returns. Gaud favors health-care, consumer and alternative energy stocks.

Tony Hsu at Dalton Investments said Chinese equity indexes have been weighed down with large positions in state-owned companies that tend to put political interests ahead of shareholder returns. The World Banks said in February 2012 that over 25 percent of China’s state-owned enterprises are unprofitable and their productivity growth has trailed that of private firms the past 3 decades. Hsu said SOEs primarily serve the interests of the government, frequently making decisions with little regard for return on investment. Hsu prefers Chinese companies run by entrepreneurs with large ownership stakes, and sells short shares of state-owned companies.

CLSA Asia Pacific Markets and the Asian Corporate Governance Assn said China was ranked 9th out of 11 Asian countries for corporate governance as of September 2012 and had the biggest deterioration in the region since 2010.

Mauro Ratto at Pioneer Investments said this period of uncertainty can last longer than expected, and it is difficult to see a catalyst for the Chinese market.

Read the full article at http://www.bloomberg.com/news/2013-07-14/china-wealth-eluding-foreigners-as-equities-earn-1-for-20-years.html

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