For long-term investors, the famous ‘tortoise and the hare’ fable is a useful reminder that the stock, sector or country racing ahead today may not be the winner tomorrow.
This has been true of the performance of Chinese stocks vis-à-vis Wall Street at nearly every juncture over the past 30 years, perhaps surprisingly, given China’s surge to global economic and financial powerhouse status in that time.
With economic, trade, and geopolitical relations between the two superpowers at their lowest ebb in decades, investors are more attuned than ever to the risks of putting their money in China for the long term.
Few fund managers with a global mandate will not have Chinese assets in their portfolio, however, such is China’s size and importance. This has been the case for years and is unlikely to change.
But presence does not guarantee performance.
If that has been true over periods comprising China’s boom years of double-digit annual growth, how will relative returns pan out when growth converges ever closer to U.S. levels in the coming years and decades?
On most long-term comparisons with the Shanghai Composite going back 30 years, or with the blue chip CSI300 index since its launch in December 2004, the S&P 500 has outperformed Chinese stocks, in nominal price and total return terms.
By curious chance, if you had invested one dollar in the S&P 500 and one yuan in the CSI 300 on the day of its launch nearly 19 years ago, your accumulated nominal return would be almost identical today at around 260 per cent.
Looking into the 10- and five-year rear-view mirrors, however, Wall Street’s total returns have outpaced China by some distance when measured both in domestic currencies and in U.S. dollar terms.
Whether you’re a China bull or bear, it is highly likely that the gap between Chinese and U.S. economic growth over next 20 years will be smaller than it was in the last 20.
The years of double-digit annual growth in China are gone - Goldman Sachs expects it will slow to 3 per cent by 2034 and Morgan Stanley says a ‘debt-deflation scenario’ could slow nominal GDP growth to just 1.7 per cent by 2027, even lower in dollar terms.
Many observers say demographics, deleveraging, and de-risking - U.S. firms on-shoring, new supply chains, and trade tensions – will be a considerable long-term drag on Chinese growth.
Based on 12-month forward price/earnings multiples, U.S. stocks are twice as expensive as Chinese stocks. For the past 10 years Chinese stocks have been substantially cheaper than U.S. stocks, and most of the decade before that they were usually cheaper too.
But the gap has rarely been this wide, and a growing number of investors and money managers are looking more favorably upon them.
Colin Graham, head of multi-asset strategies at Robeco, is one. He reckons the ultra-cheap valuations reflect an outlook for the Chinese economy - the second largest in the world and still growing solidly - that is simply too gloomy.
“There are reasons to be optimistic. Fiscal stimulus is more targeted now – it’s not ‘big bang’ stuff, and should lay a stronger foundation for the next cycle,” Graham says.
-- Jamie McGeever, Reuters
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Stocks to ponder
Stantec Inc. (STN-T) This is a consulting, design, and engineering company with five core operating segments: infrastructure, environmental services, water, buildings, and energy and resources. As a design and engineering firm, Stantec does not face construction risks. Long-term investors have been rewarded with the share price closing at a record high in September. And as Jennifer Dowty tells us as she reviews the investment case, a key catalyst may come on Dec. 5 when the company reveals a new three-year strategic plan.
PHX Energy Services Corp. (PHX-T) The stock has a unanimous buy recommendation from four analysts with an average target price of $11.56, implying a potential price return of 40 per cent. This week, the company announced a 33-per-cent dividend increase along with better-than-expected quarterly earnings. Currently, the dividend translates into a nearly 10 per cent annualized yield. The downside? As Jennifer Dowty tells us, the share price in this energy services stock can be very volatile.
The Rundown
Inflation is retreating and stocks are recovering. So why is copper in the dumps?
The U.S. economy is showing surprising strength, inflation is declining and the S&P 500 index has rebounded about 6 per cent over the past nine trading days. A key holdout in this sunny outlook: copper. The futures price is down 15 per cent from a recent high in January. The share prices of copper producers are in a deeper funk. The bullish case rests on rising demand for copper as the pace of decarbonization and electrification picks up, underpinning prices. But as David Berman tells us, this case is wobbling right now.
Preferred shares are starting to look attractive, but tread carefully
Preferred shares are listed on stock markets and appreciate in value similar to a common stock while paying a fixed dividend. According to veteran fund manager Tom Czitron, a buying opportunity may be approaching. But investors need to know several things about these types of securities first.
Don’t fight the Fed, we’ve seen this movie before
As banks and asset managers prepare 2024 investment outlooks, the emerging consensus will be tempered by the fact so many were wrong-footed this year by the relentless rise in U.S. borrowing rates. If investors failed to heed the ‘don’t fight the Fed’ mantra this year, they should be doubly cautious about ignoring it again next year, explains Reuters’ Jamie McGeever.
Also see:
Falling Treasury yields could turn Fed hawkish if financial conditions ease
Investors spurn options hedges as U.S. stock rally crushes fear
Others (for subscribers)
The highest-yielding stocks on the TSX, plus risk data
Number Cruncher: Eight LNG stocks with sustainable dividends
Number Cruncher: 20 resilient equity funds
Friday’s analyst upgrades and downgrades
Thursday’s analyst upgrades and downgrades
Ted Dixon: Cardinal Energy’s John Brussa buys during another crude oil pullback
Monica Rizk: Bullish on Microsoft Corp.
Globe Advisor
Why this money manager says it’s not ‘hide in the bunker time’
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Ask Globe Investor
Question: Do you expect that any banks will raise their dividends before the end of the year?
Answer: Yes, there will likely be some dividend increases – just not any huge ones, given concerns about a potential recession, rising provisions for credit losses and slowing loan growth.
Desjardins Securities predicts the Big Six banks will raise their dividends by about 3 per cent, on average, when they report fourth-quarter results in late November and early December. Specifically, it expects that Toronto-Dominion Bank (TD) will hike its dividend by 5 per cent, with Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CM), National Bank (NA) and Royal Bank (RY) each raising their payouts by about 3 per cent. The only big bank not expected to raise its dividend is Bank of Nova Scotia, which typically reviews its dividend when it posts second-quarter results in May.
--John Heinzl (E-mail your questions to jheinzl@globeandmail.com.)
What’s up in the days ahead
The latest stock market craze is upon us. A new class of obesity and diabetes drugs known as GLP-1s is being hyped as the weight-loss holy grail the pharmaceutical industry has chased for decades. Is there an opportunity here for investors? Tim Shufelt will explore.
That rate cut trade: World market themes for the week ahead
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff