I brought you two charts of the day, actually. Today stock market indices fell in all Asia, also in China, by 2-3 percent. Are they undervalued, perhaps? Are they cheap already? Let’s see one of these indices, maybe the most important one, the Shanghai Composite.
Does economic growth lead to index growth?
We saw economic growth twice, three times, four times larger in China, as in Europe or in America in the last decade. In 2010, it was by more than 12 percent per annum. It is slowly decreasing since then, but with more than six percent, it is still much higher than in the so-called developed countries.
If we draw a chart of Shanghai Composite and the American S&P 500 stock index for 10 years, the difference is overwhelming. The S&P 500 surged 240 percent, that means, has more than tripled. The Shanghai Composite is 3.3 percent lower in a decade. What a huge difference.
Predicting the future
Means that Shanghai stock market is very cheap now? We can’t say. Stock markets are anticipating or trying to anticipate the future. Pricing in the next couple of years, and not the present or the nearest future. That huge economic growth could have been priced in earlier, before 2010 or 2009.
Actually, I think it was priced in already in 2007-2008, and then again, in 2014-2015. There were two giant jumps in the Chinese index, and now we are in a rift between them. See the 20 years chart. In two decades, the two indexes performed almost equal (113 and 90 percent higher):
I can’t tell if Chinese stocks are undervalued or not and risks are also plenty enough. But if this market follows the same pattern than before, a new hype can happen in some years. Prices could double, triple again. And after that, probably, also crash again. No idea if this happens in 1, 2 or 5 years. But better I draw sometimes these charts and think about again and again.
Another conclusion: market comparisons are easy to manipulate. You only have to choose the right start date. :)