Comparing Valuations in China and the U.S.

Since US markets peaked last October, the S&P 500 is down 41%, while China's Shanghai Composite is down 68%.  Over the same time frame, the trailing 12-month P/E ratio of the S&P 500 has gone from 19.62 to 20.21, while the P/E ratio of the Shanghai Composite has fallen from 45.85 all the way down to 14.31.  So even though China's equity markets have declined much more than the US on a percentage basis, earnings have held up much better. 

China is still considered an emerging market and is experiencing growth of 8% or so.  Growth stocks generally have much higher valuations than value stocks, and it's surprising to see China's P/E at 14.31, or 6 points lower than the S&P 500's P/E of 20.21.

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Comments

[bosun.j:]

You young fellas seem to be surprised about allot these days!

2008 Nov 11 01:57 PM

[coastalpirate:]

what is the point? is China worth investing in versus the US? P/E and percent declients by themselves don't tell me anything

2008 Nov 11 02:02 PM

[bosun.j:]

Jim Rogers is a heck of allot smarter than these young fellas. Jim Rogers divested or is divesting all his American holdings. He moved out of America altogether. He's putting a big portion of his money in China. One might use that level of commitment as a measure.

2008 Nov 11 02:23 PM

[Chris B:]

Of course, it's always the E part in the PE ratio that is questionable. Otherwise, you could just pick low PE stocks in each market and have bought bargains in both cases.

With China, however, I have to question the validity of stated earnings. What accounting standards were used? Who is doing the auditing? What are the consequences for corruption and misstatements? Can we even get information about insider trading?

Yes, I hear you. The US has lagged in each of these areas too. I would argue that business standards in the US are not as bad as in China, but the general observation explains a lot about why investors are driving both of these markets lower. They are attempting to buy a margin of error around claimed earnings.

2008 Nov 11 03:04 PM

[Josh Stern:]

I use screens as an initial method to find companies with little or no doubt, lots of cash, and trading at multiples of 1x-4x cashflow and 0-1.5x revenue. A very large portion of the companies fitting the description these days are microcap China based ADRs. It's very common over the last month for these companies that are already down 50-90% to report strong earnings and a decent outlook and then turn around and go down some more the next day. The "reason" for that? It's a bear market...almost by definition everyone is skeptical of everything they can imagine to be skeptical about, and then some. And the investors who are not inclined to be so skeptical are out of cash or facing redemptions. Baskets of these stocks will be outstanding long term investments, but the timing of how long that will take is anyone's guess at this point.

2008 Nov 11 04:38 PM

[JesterJames:]

numbers don't say everything. Chinese companies aren't as transparent as US companies. I would be very skeptical of those numbers. one of the little known secret of chinese company is that truely profitable ones don't want or need money from going public. They can fund all their expansions with normal operations or private equities.

2008 Nov 11 04:59 PM

[User 265729:]

Jester James,

Surly you jest...

Is the Fed hiding what they are doing with $2 TRILLION in taxpayer's money *transparent*?

www.bloomberg.com/apps...

Read the Bloomberg story.

Maybe we are becoming more like China, than China becoming more of a democracy.

2008 Nov 11 05:01 PM

[Owen:]

Where do you get the P/E figure of 20.21 for the S&P? I'm looking at this week's issue of Standard & Poor's newsletter. Based on their figures, the current (today's close) level for the S&P500 is trading at a P/E of 12.3 using 2008's earnings, and a P/E of 9.6 using 2009 consensus estimates. Your figure of 20.21 implies earnings of $44.40, almost half of what the most pessimistic analysts see. Where does this number come from?

2008 Nov 11 05:30 PM

[investor88:]

Numbers have to be checked as some say sp500 pe is only 12x not 20x. China pe of 12x may be right based on reported figures but the element of negative surprise in China can be more shocking so investors are ever so cautious rightly or wrongly.

2008 Nov 12 08:18 AM

[rdr4:]

I am 100% in China and have been out of Wally Street since the 70's. Believe what you must, but there's no recession at my house.
The US spends billions yearly to make China look bad. We do not have democracy here, either. ( Read Jefferson or Franklin to get a glimpse of democracy.)
I would like to get some of the $15,000 a month the CIA pays the Dalai Lama, and undisclosed amounts paid to Human Rights Watch, Reporters without Borders (sans verite') to be China irritants.
If you believe the media about China, you're clueless.

2008 Nov 12 09:36 AM

[vraykin:]

Chris B., your information is very interesting! Could you point to an efficient way of investing into the China small caps? Buying individual ADRs is too tricky. Thanks!


On Nov 11 03:04 PM Chris B wrote:

> Of course, it's always the E part in the PE ratio that is questionable.
> Otherwise, you could just pick low PE stocks in each market and have
> bought bargains in both cases.
>
> With China, however, I have to question the validity of stated earnings.
> What accounting standards were used? Who is doing the auditing?
> What are the consequences for corruption and misstatements? Can
> we even get information about insider trading?
>
> Yes, I hear you. The US has lagged in each of these areas too.
> I would argue that business standards in the US are not as bad as
> in China, but the general observation explains a lot about why investors
> are driving both of these markets lower. They are attempting to
> buy a margin of error around claimed earnings.

2008 Nov 12 08:49 PM

[Chris B:]

No I can't. That's the problem. With no modern legal / regulatory framework, that Chinese cell phone company you just bought might as well be run from some guy's apartment. What are you going to do? Visit? Sue? It's the Wild West out there.... er... East... You can't assume anyone gives a damn about your shareholder rights and shareholders have no recourse for anything.

In investing, a sure thing is anything but.


On Nov 12 08:49 PM Viktor wrote:

> Chris B., your information is very interesting! Could you point to
> an efficient way of investing into the China small caps? Buying individual
> ADRs is too tricky. Thanks!

2008 Nov 13 05:33 PM