Discounted China Stocks with attractive P/B : Time to buy?

Source: Bloomberg

China stocks may extend their rally after having traded at the biggest discount to global equities in more than five years, if history is any guide.The CHART OF THE DAY tracks the price-to-book ratios of shares on the Hang Seng China Enterprises Index and the MSCI World Index of developed and emerging stocks since March 2006. Chinese companies listed in Hong Kong were valued at 1.3 times net assets on Oct. 5, compared with 1.5 times for the MSCI counterpart, data compiled by Bloomberg show. That discount was the biggest since March 22, 2006. The China measure traded at a 1.4 multiple yesterday, after the index rallied 2.1 percent.

The last time there was such a discount, the Hang Seng China gauge surged 66 percent in less than 10 months through early 2007, compared with a 12 percent advance by the MSCI index, the data show. After the Chinese index’s multiple sank to a record low of 1.05 on Oct. 27, 2008, the index rallied 176 percent through Nov. 16, 2009, compared with a 47 percent advance by MSCI’s global measure.

“The market has reacted very negatively to the potential for overheating and hard landing in China,” as well as concerns about European debt and the U.S. economy, said Mark Konyn, who helps manage about $15 billion as chief executive officer of RCM Asia Pacific Ltd. “We look more towards the price-to-book ratio, and believe the market is oversold and share prices have discounted a significant number of potential negatives.”

The so-called H-share stock index tumbled 29 percent in the past 12 months through Oct. 11, compared with a 6.2 percent decline by MSCI’s gauge. Chinese stocks dropped as the government set measures to cool inflation and amid expectations export demand would falter. Twelve percent of global investors in a Bloomberg poll published last month predicted economic growth will slow to less than 5 percent within a year, a pace unseen in the past two decades.

The Hang Seng China Enterprises Index rose 17 percent over the five days through Oct. 12, rebounding from its lowest level since April 2009 and boosted by China’s state-run Central Huijin Investment Ltd. buying shares of the nation’s four biggest banks. The index’s price-to-book ratio yesterday was 43 percent less than the five-year average of 2.5 times.