As
we
mark
Chinese
New
Year
and
stock
markets
there
enjoy
a
brief
holiday
respite,
it
provides
us
with
an
opportunity
to
re-assess
the
case
for
investing
in
the
country.
It
is
fair
to
say
the
Sinophile
investor
experience
since
2021
has
been
a
series
of
disappointments.
Returns
have
materially
lagged
other
markets.
Growing
trade
tensions
with
the
US,
a
slowing
economy,
rising
debt
levels,
a
real
estate
market
crisis,
government
crackdowns
on
private
sector
firms,
have
all
sent
overseas
investors
scurrying.
Critics
have
coined
the
phrase
“the
Three
Ds” –
debt,
deflation
and
demographics –
as
reasons
to
avoid
the
stock
market.
Others
labelled
the
market
as
uninvestable.
Why
Should
I
Invest
in
China?
Despite
this,
China
equities
make
up
around
one
quarter
of
the
emerging
market
index
and
the
second-largest
economy
in
the
world,
and
its
stock
market
has
a
history
of
delivering
tremendous
gains
for
investors,
most
recently
in
2019
and
2020.
Since
then,
though,
the
index
has
fallen
more
than
50%,
and
it
is
clear
there
are
signs
of
outright
capitulation
both
within
and
(especially)
outside
China
when
it
comes
to
assessing
Chinese
equity
risk.
A
core
thesis
for
an
investment
in
China
revolves
around
valuation.
The
price/earnings
multiple
for
China
is
around
10x,
which
looks
attractive
compared
to
history.
It
requires
patience,
but
investing
in
markets
that
are
trading
well
below
their
intrinsic
value
is
a
solid
basis
on
which
to
build
a
position.
Why
MIM
is
Still
Excited
In
addition,
investors
can
assess
a
raft
of
dynamic
and
innovative
firms,
often
in
the
technology
sector.
For
example,
the
largest
holding
in
the
index
is
Tencent
(TCEHY),
which
reported
a
return
on
equity
of
23.9%
and
operation
margin
of
28.6%
in
its
most
recent
financial
results.
These
are
levels
of
profitability
in
line
with
other
more-highly-rated
technology
firms.
This
is
just
one
example
of
a
large
index
constituent
where
economic
uncertainty
is
reflected
in
the
stock
price.
The
final
point
we
would
make
on
China
is
sizing.
Given
the
risks,
we
are
exercising
a
degree
of
caution
in
the
amount
of
capital
we
have
deployed
in
the
market.
Nevertheless,
we
remain
excited
by
the
long-term
opportunity.
Mark
Preskett
is
senior
portfolio
manager
at
Morningstar
Investment
Management
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