Valuations of Chinese shares have been pushed down exceptionally low again, but the risks seem overwhelming to the investor, writes HS Vision editor Joakim Westrén-Doll.
Large and unpredictable China is once again attracting investors.
In early January, Bloomberg evaluatethat Chinese stocks are now the cheapest in the world compared to the return expectations.
At least you can find apparent undervaluation in stock prices, even if you pick companies from the list with your eyes closed.
For example, electric car Byd passed by in October–December of last year, Tesla finally became the world's largest supplier of electric cars. The market value of the latter is still ten times higher.
An embarrassingly familiar case is the e-commerce giant Alibaba, which many Finnish small investors scooped into their portfolios in recent years. At the same time, the stock has continued to fall. Even now, the market does not exactly price profit growth for the company, even if the cash flows indicate it.
China will probably continue to be a trap of unpleasant surprises for the investor.
If you mistakenly bought the Hang Seng index at the highs of 2007, the investment is still at a loss.
The political risk related to the country is devilishly difficult to price. Owner value is at the mercy of the central government.
We got a reminder about that last time in Decemberwhen Chinese authorities unexpectedly released a long list of restrictions targeting the country's giant video game market.
The new policies practically banned the main means of hooking players. The industry's earning models changed like lightning. As a result, more than 40 billion euros disappeared from the market value of the large group Tencent in an instant.
A day later, the authorities hastened to partially retract their speeches. Investors should of course not be appeased by the delay.
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A lost decade may lie ahead.
On the other hand China's central leadership seems at a loss to fix the country's poor macro outlook.
Beijing has been disconcertingly pleased with the slow economic recovery. Drastic resuscitation measures have fallen short.
Investors are worried by estimates of the country's deflationary pressures, which have no end in sight. The collapsed housing market weakened consumer demand.
The negative cycle deepens if prices fall even further and the country's domestic market does not get on the path to growth. At the same time, deflation would make it difficult for the real estate sector, which is collapsing under its debt burden. The national economy may face a lost decade.
In January geopolitical risks are in particular on the wallpaper.
Tensions between China and the United States have continued to escalate, creating uncertainty in the business world. At the beginning of January, it became clear that the Dutch government blocked semiconductor giant ASML's equipment export to China. Bloomberg's anonymous sources presented the United States as the one pulling the strings.
The direction of tensions between China and Taiwan will become clear on Saturday, January 13, when Taiwan will hold presidential and parliamentary elections.
In advance, the DPP party has been tipped to win the election, which Beijing would be worried about. The DPP supports Taiwan's strong right to self-determination.
At worst, the consequences can be massive.
According to Bloomberg, the escalation of the conflict would shock the global economy if China ended up with a sea blockade of Taiwan, for example. Supply chains would be paralyzed if chips produced in Taiwan remained on the island. According to Bloomberg's estimate, the global gross national product could fall by up to five percent in the next year.
The Chinese investor would at least be comforted by the fact that the returns would be uniformly terrible everywhere.
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