To benchmark the China stock market, I use the S&P China SPDR (GXC) ETF based on the
S&P BMI China Index. The GXC holds over 600 stocks ranging from major cap. size to small.
The CXC has roughly $6.00 in net per share and trades around 11x eps. It is much less volatile
than the more notorious Shanghai Composite. GXC Daily
Since its inception in early 2007 at a price of $50, earnings for the GXC have grown nearly 15%
per annum. Corporate profit growth in China has slowed down in the wake of the large 2009 -
2010 fiscal stimulus program and the p/e ratio for the GXC has naturally eroded. With China
struggling to meet its 7% per year growth target, the growth of earnings for the GXC in the
future will continue to be more moderate than in prior years. I would rate the stock as reasonably
priced at $65 (The stock is currently $69+).
The GXC caught the speculative fever for China stocks which began to ramp up around mid - 2014.
GXC shot up from the $70 area to close to $100 this year, but has retreated back to the $70 level
in the recent big China sell - off.
It is foolish to think China can become a broadly diverse, stable consumer led economy so soon
in its development. That has to be a long term objective to be worked at. In the meantime, to
stabilize growth, China has devalued the Yuan, is cutting interest rates and bank reserve requirements,
and is accelerating the growth of its basic money supply. The China economy is in deflation and
the PBOC is having to take stronger action to reverse economic growth deceleration. With more
monetary and fiscal support ahead, the GXC is probably fairly near to sold out.
The bottom panel shows the relative strength of the Shanghai to the GXC. In my view the Shanghai
would probably be reasonably priced against the GXC at a little below 40x or about 2700. Since
the Shanghai can be very flighty, the 2700 level has to be taken as a very approximate approximation.
Rome was not built in a day and neither will China be.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!