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China reality check: Stocks are still too expensive for Mobius


[SHANGHAI] Chinese shares have tumbled faster than any of their global peers, suffered the first bear-market retreat since 2012 and erased more value in a month than the annual economic output of the UK.

After all those losses, is now the time to go bargain hunting?

Not just yet. That's the refrain from BlackRock Inc, UBS Group AG and Templeton Emerging Markets Group's Mark Mobius, who say mainland stocks need to fall further before they're worth buying.

Even after the selloff, China's Shanghai Composite Index is 89 per cent higher than it was 12 months ago. The gauge's valuation is 50 per cent above its five-year average, while the median price-to-earnings ratio on Chinese bourses is the most expensive among the world's 10 largest markets. With more than 1,300 mainland shares frozen by trading halts, prices may not fully reflect a buildup of selling pressure over the past month.

"Valuations are still about double where they were last summer," Russ Koesterich, the global chief investment strategist at BlackRock, which oversees about US$4.8 trillion, said in a July 10 interview on Bloomberg Television. "Given the magnitude of the run-up, it is possible that even after a 30 per cent correction, we haven't gotten back to something approaching fair value." The following four charts show where Chinese valuations stand now.

China's benchmark index trades at about 20 times trailing 12-month earnings. While that's down from 26 at the height of the rally in mid-June, it's still well above the five-year average of 13.4, according to data compiled by Bloomberg.

"It's still expensive," said Wenjie Lu, a strategist at UBS in Shanghai. "The downside risk for A shares is still big."

Given the heavy weighting of low-priced bank shares in Chinese equity gauges, some analysts prefer to look at the median price-to-earnings ratio instead. In China, that was 57 on Friday, versus 19 for America's Standard & Poor's 500 Index, 16 in the UK and 13 in Hong Kong.

China's smaller stocks, some of the biggest winners of the bull market, are still trading at price-to- earnings ratios 45 per cent higher than their five-year average. The benchmark ChiNext index is valued at 81 times profit, versus 50 for the Russell 2000 Index in the US.

The Shanghai Composite trades at a 12 per cent premium versus the MSCI All-Country World Index, compared with a 14 per cent discount on average over the past five years.

"While we are already investing in China, our strategy is to wait until prices are so attractive that it's time to look for further long-term opportunities," Mobius, chairman of Templeton Emerging Markets Group, wrote in a report. "We believe that point is close with some stocks, but we probably haven't hit the bottom yet."