Earnings Rise in China: Stimulus Efforts Clearly Working

China's equity outperformance is not a breath of hot air. The 80% rise in the MSCI China Index (C$) is underpinned by rising earnings, but price appreciation has outpaced earnings leading to rising valuations. This is not unusual at the beginning of economic recovery.

Government stimulus measures are clearly working and leading to a major ramp up in analysts' twelve-month forward earnings estimates in China. The rally is broad-based with only telecom services not participating, according to a recent report by Thomson Financial.

Leading lights are utilities, technology and industrial sectors with one-year ahead earnings forecasts rising 125%, 78% and 41.7% respectively. Earnings in the industrial sector are expected to rise to US$12-billion over the next year based on analysts' estimates.

The rise in share prices is clearly outpacing earnings, however, and valuations suggest the market is no longer cheap; but nor is it excessive with the P/E ratio on the MSCI China Index at 16.74 well below its past peak of 30 in 1997.

It is not uncommon for prices and valuations to rise at the start of economic recovery and investors need not be alarmed. The MSCI China Index appreciated strongly in 2003 when the global economy recovered from recession taking its P/E ratio to around current levels. A subsequent earnings rally allowed equity prices to continue rise, more than doubling between 2004 and 2007, yet valuations were no higher at the end of that period.

Comments

[onebir:]

"China's equity outperformance is not a breath of hot air."
More likely a sign of overdose of hot money.

"The 80% rise in the MSCI China Index (C$) is underpinned by rising earnings, but price appreciation has outpaced earnings leading to rising valuations. This is not unusual at the beginning of economic recovery."
And at the beginning of a credit-induced bubble. H1 09 lending was three times that in H1 08. Currency controls make it pretty difficult to get this out of the country. Any guesses where some of it's ending up?

Jul 09 10:36 PM