After a once a decade robust rally, some may argue that A shares or Chinese ADRs (ASHR, FXI, KWEB, for example) are now faired valued or over valued.
No. Not the case. Why?
SOme may look at their trailing PEs vs, their own long term average, and point out that the current reading is right at the average now, or in some cases, maybe a little bit higher.
Can we conlude that they are fair valued now? No, not at all.
First, we need judge where the chinese economy is in its economic cycle.
It is at the late stage of the cycle or early stage of the cycle?
At late stage, the economic activity reaches its pick level. Did we see this in last 12 month or at present? No.
Therefore, It is in the early cycle, or we are at the trough of the economic cycle.
After multi years of economy slowing down and depressed consumer spending, the Chinese companies earnings are collapsed. Now, the chinese goverment is jumping start the economy. And we are at the begining of the new economic cycle, and the early stage of earnings growth cycle.
At this stage, as mentioned before, the trailing EPS was depressed. With depressed trailing EPS, the PEs looks high. It is true for any economy. If you look at US cases, you will also find out that at the trough of economy or at the begining of the bull market, the PEs were relative high.
But, as economy growth start to accelerate, the EPS growth will accelerate, and the PEs will come down, even with higher share price.
That is why Chinese market are still undervalued.
