China’s valuations are ‘way too low,’ strategist says — here’s why

Valuations of Chinese stocks are “way too low” and investors should be looking to cautiously re-enter the world’s second-largest economy, according to Shaun Rein, founder and managing director of the China Market Research Group.

China recorded its first month of inflation in February after four months of deflation, new figures showed, with the consumer price index climbing 0.7% year-on-year after a 0.8% annual decline in January.

However, Rein attributed this to the Lunar New Year period, and insisted that deflation “still looms over the Chinese economy.”

“We are still seeing though that Chinese consumers, especially the wealthy ones, are quite nervous — they’re still trading down and skipping big ticket items,” Rein told CNBC’s “Squawk Box Europe” on Monday.

“They’re cautious about whether or not the government is going to launch a bazooka-like stimulus — clearly they’re not going to.”

He suggested that in the short-term, global luxury brands could continue to struggle with a lack of Chinese demand, and that domestic neighborhood electric vehicle (NEV) manufacturers could be in for a tough run.

China’s well-documented economic struggles have led to broad declines in its stock markets over the past year, as growth was weighed down by a slump in real estate and exports. The Chinese government is targeting 5% growth in 2024, having notched 5.2% in 2023.

“Admittedly, the NPC Work Report last week commits to keeping ‘money supply and credit growth in step with the real GDP and inflation targets’, potentially signalling policymakers will try a bit harder to boost inflation towards the 3% target compared to the previous year,” Zichun Huang, China economist at Capital Economics, said in a research note Monday.

“But we think China’s low inflation is a symptom of its growth model built on a high rate of investment. As reducing dependence on investment is still far off, we expect inflation to stay low in the long run.”

Although the near-term headwinds mean the investment landscape remains tricky, Rein argued that measures taken to reconfigure the Chinese economy away from its traditional reliance on real estate and infrastructure were starting to have an impact, and the longer-term picture is more promising.

“China’s economy is weak but it’s not that weak. If you’re a multinational, if you’re looking to drive growth over the next three to five years, the next China is China. It’s not India — India’s only a sixth of the GDP of China — it’s not Vietnam. These are small markets, so I actually think investors should be looking long-term at China again, it’s definitely investible,” he said.

“It’s too early to call a bull market, you still have to be very cautious, the economy is still weak – don’t get me wrong — again the D word (deflation) looms over China, there is still a weak job market, but the valuations are too low.”

Despite a modest rebound in the last month, Hong Kong’s Hang Seng index is still down more than 14% over the past year, and Rein said he had personally begun investing in Hong Kong-listed A-shares around a month ago on the belief that “valuations are way too low.”