While almost every research house has been overweighting on China for the past two years, the reality has turned out very differently.
Chinese equities in Shanghai has been underperforming since early 2010. In fact, you would have lost almost 20% if you hold the Shanghai A shares market since early 2010. On the contrary, holding S&P 500 from early 2010 would gain almost 15% over the same period of time.
Holding Hong Kong equities is better than Shanghai, partly because Hong Kong real estate developers stocks have done very well between September and November of 2010 as the market was getting excited about the second round of quantitative easing. Though hardly as good as holding US equities. If you hold the Hang Seng Index since early 2010, you are left with almost exactly the same amount money as you had in 2010.
True, Hong Kong and China stocks are, on the whole, quite cheap. But cheap valuation does not mean that it cannot go even cheaper. The Japan’s NIKKEI 225 have been “cheap” for many years, but it is in the mega-bear market for more than 20 years now, and it is still making new lows. Shanghai market has come dangerously close to the biggest bear markets in history. Before jumping to the conclusion that it is now a bargain and buy on dip, ask the question of whether we are headed to a bright future or a gloomy mega-bear market.
This article originally appeared here: China/Hong Kong Equities Have Been Losers
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