China is waking up.
The Shanghai Stock Exchange Composite Index (SSEC) is up nearly 10% so far this month. Of course, most folks haven’t noticed because most folks abhor the idea of investing in Chinese stocks – with good reasons…
Chinese stocks are risky. There are lots of fraudulent companies listed on the Chinese stock exchanges. Even the legitimate companies are prone to posting sketchy financial reports.
The United States and Chinese governments are rivals.
China’s government is known for manipulating its financial markets.
And the list goes on… There are plenty of reasons NOT to buy Chinese stocks as investments.
But, every now and then, a low-risk/high-reward setup appears – where it can be quite rewarding to TRADE Chinese stocks.
Today is one of those times.
Right now, the Shanghai Stock Exchange Composite Index (SSEC) trades near its lowest relative valuation to the S&P 500 in 20 years. Look at this long term chart comparing the SSEC to the S&P 500…
When the chart is rising, SSEC is performing better than the S&P. When the chart is falling, SSEC is performing worse.
For the most part, over the past 20 years your money has been treated better in the U.S. than in China.
There are times, however, where the valuation difference is so extreme it has paid well to own Chinese stocks.
In late 2008, for example, as the U.S. markets were still dealing with the Great Financial Crisis, SSEC bottomed. It then rallied about 80% over the next three months.
In February 2022, this ratio chart hit another extreme low. SSEC rallied 20% in about four weeks, while the S&P 500 dropped 7%.
And, in November, 2022 – when the ratio chart hit its lowest point ever to that point – the Chinese stock market rallied 15% in just two months. The S&P 500 was unchanged during that time.
Today, the ratio chart is back down near its lowest point ever. Chinese stocks had a miserable 2023, and a miserable start to 2024. At the end of January, SSEC was down 8% from where it started the year. Meanwhile, the S&P 500 was up about 5%.
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But, it looks like that trend is changing.
Yes… the S&P 500 is up more than 4% so far this month. But, the SSEC is up 7%. And, that relatively strong performance has caused the ratio chart to turn higher. Chinese stocks are starting to outperform US stocks. And, it looks like that trend could last a while.
None of this guarantees a rally in Chinese stocks, of course. Nothing is ever guaranteed.
This historically low valuation does suggest, however, that the risk to owning Chinese stocks right here is limited. And, the potential reward could be substantial – especially if the recent rally in the S&P cools off a bit and money starts to rotate into underperforming markets.
Best regards and good trading,
Jeff Clark