Investors looking for bargains have a tough job in developed markets. The number of super-cheap deep-value stocks, taking no account of risk, has tumbled to the lowest level since before the rescue of Greece in May 2010, according to Société Générale analysts.
Over in China there is no such problem. The nine Chinese banks listed in Hong Kong all trade at a multiple of less than six times expected earnings and half trade below book value. If you think that sounds like a steal, look to the mainland’s stock exchanges: all but two of the dual-listed banks are even cheaper in their mainland-traded A-shares than the Hong Kong-listed H shares.
The same goes for Chinese dual-listed stocks in general. Mainland-listed shares, hard for foreigners to access, have since September sporadically traded at a discount to the same companies listed in Hong Kong and are now at their biggest discount since just before the H shares started a five-month, 30 per cent plunge in February.
Is this cause for concern? Probably not. China’s financial system is in terrible shape and the country’s investment-driven growth model is unsustainable (while its air is increasingly unbreathable). But when this will crack is anybody’s guess. What matters more is what China chooses to do about it.
We should get some clues to the future of China’s banks and state enterprises this weekend. President Xi Jinping and other top Communist party officials will meet and he is expected to offer guidance on economic and financial reform. Dramatic changes to state-owned enterprises are unlikely but policy should become clearer – and that will help determine whether these stocks are cheap or correctly priced disasters.
Investors who do not like the uncertainty of political control have a problem. Aside from the state enterprises and banks, China is not especially cheap. The predominantly private-sector shares listed in Shenzhen are less expensive than they were but at 16 times forward earnings are pricier than developed markets. Bargain-hunting is hard.