China exchange-traded funds have been amongst the hardest hit ETFs this year. Valuations are difficult to pin down but consider the "A" share market of shares available to only Chinese citizens and certain institutional investors. The only option for these shares is the Morgan Stanley A share fund (NYSE:CAF) which normally trades at a 30% discount to NAV.
These domestically listed shares are trading on 37 times this year’s earnings which means they are still the world’s most expensive.
But it gets worse if you consider the quality of earnings and the likelihood that growth, margins and profits will likely be rated down in the near future. Morgan Stanley reckons investment and non-operational income contributed 21 per cent of third-quarter EPS for non-insurers. The Financial Times reports that the bluer chip MSCI China index of companies listed abroad has forecast EPS growth of 22 per cent. Of this, 8-10 percentage points is from renminbi appreciation and 5-7 percentage points from an effective cut in corporate taxes.
So despite the fallback in prices, p/e's for the Shanghai market are still very high, the quality of earnings is relatively poor and projections of forward earnings are likely to be geared back as global growth slows.