Chinese Stocks Could Be A Bargain: MSCI China Ratio Analysis

The MSCI China Index tracks the performance of almost 800 Chinese stocks. And right now, it could offer better value than stocks of the MSCI World Index, and similar indices for the US, Japan, UK, Europe, and emerging markets. Per the chart below, China has the lowest price-to-earnings (P/E), forward price-to-earnings (Fwd P/E), and price-to-book (P/B) ratios of the bunch. 

P/E, Fwd P/E, and P/B ratios of the MSCI China Index explained:

Here’s a breakdown of each ratio and what it means:

Trailing price-to-earnings ratio (P/E): This is the price investors pay for company earnings over the past 12 months. China’s P/E of 11.5 means investors are currently paying $11.5 for every $1 of company earnings (or a group of companies in the case of the index). The lower the P/E, the more earnings you’re getting for each dollar invested. Compare that with MSCI USA’s P/E of 26.

Forward price-to-earnings ratio (Fwd P/E): This is the price investors pay for expected future earnings from a company over the next 12 months. The MSCI China Index has a Fwd P/E of 8.9, which means investors are now paying $8.9 for every $1 of expected company earnings. Note that these earnings are based on analysts’ forecasts, so you can take them with a pinch of salt. Still, investors use the Fwd P/E to compare the values of different investments on a like-for-like basis. The lower the Fwd P/E, the more future earnings you’re expected to get for each dollar invested. And again, China has the lowest ratio here.

Price-to-book value ratio (P/BV): This ratio measures how much investors are paying for each dollar of a company’s net assets. China’s P/BV of 1.2 suggests investors are paying just $1.20 for every $1 of the company’s book value. Lower values suggest investors are getting more assets for their money (all else being equal).

So should you buy Chinese stocks?

It’s clear from the above numbers that Chinese stocks are cheap right now. But as investors, we need to ask ourselves why they’re cheap in the first place. I’d say it’s because investors think Chinese stocks are risky, so they’ve been less willing to buy them. 

But if you’re contrarian, Chinese stocks could offer great value right now.

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