China: Long-term P/E Ratio

Bespoke Investment Group has a nice chart of the Shanghai market showing P/E ratio versus the index:




The P/E ratio seems to have been between 30 and 60 in the late 90's and early 2000's. It hit a low of around 16 somewhere in 2005 and then rose to around 50 in 2007. According to Bespoke Investment, the P/E is right now 20.95, and had averaged 36 in the last 10(?) years.

Contrarians who think a P/E of 21 is cheap (compared to a historical average of 36) may want to start looking at China. It's impossible for foreigners to invest directly in the local exchanges but you can (i) invest in the Hong Kong market, which has a lot of cross-listed shares or companies that do a lot of business in China, (ii) invest in a US-listed Chinese company (many of the smaller ones are usually shell companies incorporated in a tax haven), or (iii) invest in multi-nationls that operate in China. One of the popular techniques is to bet on China through commodities but I perceive that as being the riskiest strategy of all (commodity bulls would disagree with that... they would consider stocks to be riskier than commodities.)

Whatever your strategy, the biggest risk in Chinese stocks is not the price risk (i.e. overvalued) but political risk!

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