Why China is the Deepest Value Market in Emerging Markets Today

During their recent episode, Taylor, Carlisle, and Juan Torres Rodriguez discussed Why China is the Deepest Value Market in Emerging Markets Today. Here’s an excerpt from the episode:

Jake: What are your thoughts on China these days?

Juan: It’s the deepest value market in EM, and potentially, one of the cheapest markets in the world. There are many reasons as to why it has gotten where it is. There is a lot of uncertainty, there is a lot of fear, there’s a lot of human behavioral biases around China. Valuations are extremely cheap. It’s on the cheapest quintile of the EM universe is Hong Kong or companies listed in the Hong Kong market are some of the cheapest that you can find.

I was looking at these numbers last week. I think that the average CAPE in Hong Kong at the moment is something like 5.5 times. It’s really cheap. And that shows you how much uncertainty and fear there is.

Jake: There was a study I saw at one time that– I could see if I could dig it out and put in the show notes. But it looked at starting CAPE ratios, and then subsequent returns on 5-year, 10-year, 15-year, 20-year intervals. I believe it was after the 10-year interval, if you started at a CAPE like– I think it was 5 or less or maybe it was even 10 or less. I have to go back and look. But basically you’d never lost money in the entire dataset, because you just had such a low starting valuation.

Juan: We, in the value team, we run that type of analysis. We have it for the UK and for the US. We don’t have it for emerging markets. It’s more difficult to get it and aggregate it in emerging markets. But in the US and in more developed markets, if you are buying anything below five times, your annualized average return over the next 10 years should be very close to 14% to 15% dollars without any growth whatsoever.

Now the thing is, if you are buying below five times CAPE, there’s something really, really wrong happening. There’s a lot of fear. There’s a lot of uncertainty. And so, you really need to have a very strong stomach to actually go into the market, and pull the trigger, and just close your eyes and just buy.

Tobias: Your risk in something like that is sovereign usually, right? There’s coup or there’s a revolution, there’s a change of government.

Jake: Deeply macro.

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

Apple Podcasts