(Bloomberg) — Chinese shares have tumbled faster than any of their global peers, suffered the first bear-market retreat since 2012 and erased more value in a month than the annual economic output of the U.K.
After all those losses, is now the time to go bargain hunting?
Not just yet. Thats the refrain from BlackRock Inc., UBS Group AG and Templeton Emerging Markets Groups Mark Mobius, who say mainland stocks need to fall further before theyre worth buying.
Even after the selloff, Chinas Shanghai Composite Index is 89 percent higher than it was 12 months ago. The gauges valuation is 50 percent above its five-year average, while the median price-to-earnings ratio on Chinese bourses is the most expensive among the worlds 10 largest markets. With more than 1,300 mainland shares frozen by trading halts, prices may not fully reflect a buildup of selling pressure over the past month.
Valuations are still about double where they were last summer, Russ Koesterich, the global chief investment strategist at BlackRock, which oversees about $4.8 trillion, said in a July 10 interview on Bloomberg Television. Given the magnitude of the run-up, it is possible that even after a 30 percent correction, we havent gotten back to something approaching fair value.
The following four charts show where Chinese valuations stand now.
SHANGHAI COMPOSITE: Chinas benchmark index trades at about 20 times trailing 12-month earnings. While thats down from 26 at the height of the rally in mid-June, its still well above the five-year average of 13.4, according to data compiled by Bloomberg.
Its still expensive, said Wenjie Lu, a strategist at UBS in Shanghai. The downside risk for A shares is still big.
MEDIAN VALUATION: Given the heavy weighting of low-priced bank shares in Chinese equity gauges, some analysts prefer to look at the median price-to-earnings ratio instead. InChina, that was 57 on Friday, versus 19 for Americas Standard & Poors 500 Index, 16 in the U.K. and 13 in Hong Kong.
SMALL-CAP INDEX: Chinas smaller stocks, some of the biggest winners of the bull market, are still trading at price-to- earnings ratios 45 percent higher than their five-year average. The benchmark ChiNext index is valued at 81 times profit, versus 50 for the Russell 2000 Index in the U.S.
GLOBAL RELATIVE VALUE: The Shanghai Composite trades at a 12 percent premium versus the MSCI All-Country World Index, compared with a 14 percent discount on average over the past five years.
While we are already investing inChina, our strategy is to wait until prices are so attractive that its time to look for further long-term opportunities, Mobius, chairman of Templeton Emerging Markets Group, wrote in a report. We believe that point is close with some stocks, but we probably havent hit the bottom yet.
