By Shuli Ren
Value + momentum. China seems to have value but not enough momentum.
For the week ending Wednesday, ahead of the FOMC meeting, on a 12-month forward P/E basis, the MSCI Asia ex-Japan Index traded at 0.7 standard deviation below its long-term mean, data provided by Nomura Securities show.
China led the region with aggregate earnings upgrades of 0.4% for both 2013 and 2014 fiscal year. However, it remains the cheapest market in emerging Asia. On the same P/E basis, MSCI China traded at 9 times, or 1 standard deviation below the long-term mean of 12 times, even though return on equity (12-month trailing), at 15.1%, is comparable to the long-term mean of 14.5%.
We have discussed this multiple times on this blog: China is cheap because the MSCI China Index is packed with financials – large, state-owned banks in particular, which trade poorly due to concerns over shadow banking and potential rise in non-performing loans. On a price-to-book basis, banks still trade at 1.1 times, or 1.3 standard deviations below the long-term average.
Philippines is still the most expensive market in Asia, trading at 17.5 times forward P/E, or 1.3 standard deviations above the long-term average. Malaysia follows, trading at 15.7x forward P/E, or 1.2 standard deviations above the long-term average.
Sector-wise, consumer staples – food/beverage/tobacco – and materials carry the richest premiums, whereas financials (again) trade at the deepest discounts.
For the same period, the iShares China Large Cap ETF (FXI) lost 4.9%. The iShares MSCI China ETF (MCHI) lost 4.3%. The iShares MSCI Philippines ETF (EPHE) lost 0.4%. The iShares MSCI Malaysia ETF (EWM) lost 1.6%. The iShares MSCI Emerging Markets ETF (EEM) lost 2.8%.