LONDON, Aug 16 — Any veteran investor will tell you that financial markets overshoot when trouble hits, but what if that market is the world’s second-largest economy and the government has decided the rules of the game have changed? China’s months-long regulatory crackdown has included big...
LONDON, Aug 16 — Any veteran investor will tell you that financial markets overshoot when trouble hits, but what if that market is the world’s second-largest economy and the government has decided the rules of the game have changed?has included big names in e-commerce, the gig economy, exam cramming and most recently online insurance. Close to US$1 trillion in market value has been wiped off China Inc since February.
That compares to about 17 times at the start of the year. It could get down to 13 times, says Morgan Stanley.In March, before the latest crackdown, the average consensus 12 month share price target for stocks in the MSCI China Index, was about 40 per cent higher than a year earlier. Evergrande Property Services, part of China’s most indebted property developer, has already lost more than half of its market capitalisation from the peak. The share price is currently trading around 13 times forward price-to-earnings multiples, significantly lower than peers.Having pumped in more than US$800 billion over the past five years, investors are not about to fold their bets that China will offer the biggest boost to global financial markets in the decades to come.
While some damaged sectors are likely to bounce back over time, others, like tutoring, which the government now wants to be non profit making, almost certainly won’t.The hit has been painful. EPFR data shows around US$2 billion was pulled out of equity funds with significant China exposure in the first week of this month alone. Morningstar figures point to China-focused funds nursing at least 7 per cent negative returns.
“Investors will have to change their style of investing from being focused on yields to one based on fundamental analysis,” said Shamaila Khan, AllianceBernstein’s head of EM debt on the Global Markets Forum.
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