Chinese share valuations look to be approaching bubble levels, with certain analysts currently descr...
Chinese share valuations look to be approaching bubble levels, with certain analysts currently describing stocks on over 70 times earnings as must-buys.
The CLSA Asia/Pacific investment group, a BDT associate, has issued a report identifying 20 must-have stocks, called, To infinity and beyond.
Key picks include shipping company Tianjin Port Dev, trading on 53 times P/E. The company listed last May at HK $1.88 and is just getting started at HK $9.03, according to the group.
The top choice, HK Exchange, is up 317% over the past year and 65% in the past month, trading on 74 times 2008 earnings.
Despite this, Old Mutual's Asian Select manager Suresh Sadasivan claims there is currently no bubble in Chinese markets.
"When you consider the cost of capital for Chinese investors, the shares are probably not overvalued," he said. "Earnings growth has been good this year."
"The average P/Es for next year are 20/21, meaning we are not in a bubble yet, considering the liquidity in China. Fundamentals are still in line with value."
The manager points out the H-share markets may be in a good position to counteract a major market crash if Western demand for Chinese exports wanes.
"At the moment, you are getting extreme liquidity in China. The Chinese government can use this to prop up economies," he said.
Despite this, Sadasivan is looking to sell down his China exposure as he feels earnings growth is reflected in valuations.
"We may now get to bubble stages in the next few months, if prices keep continuing at this rate," he said.
While China may be able to control national development, it cannot control money markets completely, argues Sadasivan.
"Interest rate changes do not really work in the Chinese environment because most people do not have debt," he said. "Thus, interest rates are a blunt instrument."
Swip's Asia Pacific manager Tim Dickson disagrees with this call. He argues interest rates are too low in China and the government could use them to control the ballooning prices.
"The corporates are still borrowing in China," he said. "The debt to GDP ratio is still high, so if you put up the rates, that will affect behaviour. I suspect the people driving the stock markets domestically are also using debt somehow."
The manager believes there is already an H-share bubble in China, with prices based on investor speculation rather than fundamental value.
"We are underweight on the H-shares and red chips," he said. "It is hard to justify what is going on.
"China is one of the only big growth stories left, but we are quite fundamental, so it is not something we want to get involved in," he said.
Despite this, he believes it may be possible for risk-hungry investors to play the market bubble.
"If I was a hedge fund, I might be tempted to put some money in, but when values move away from fundamentals, it is gambling and we just cannot justify it," he added.
"It is always very difficult to call the top of these things. The Taiwan bubble in the early 90s and the Nasdaq bubble both topped out at over 100 P/Es."
The Chinese government is more concerned with preventing any ballooning than easing down existing liquidity excesses, he believes. "If the A-Share market fell, there would be a lot of noise, but not much market impact," he said.
"They probably do not want it to become a much bigger bubble, but are not too concerned with the current situation."
Elsewhere, Royal London Asset Management economist Ian Kernohan remains bullish after a trip to China last week.
"We remain positive on China," he said. "It is still one of our favourite emerging markets."
While prices do look high, he agrees when domestic liquidity is taken into account, valuations still look sensible. "We are in the foothills of a bubble, but it probably has some way to go," he said.
Companies who list more realistically valued Hong Kong H-shares, and massively overvalued China A-shares will likely see a convergence of the two, according to Kernohan. "I expect the H-Shares to converge upwards to the A-Share levels rather than the A-Shares coming down," he said.
The Chinese H-Share market should sustain growth for a further 12 months, added Kernohan.