Are the HSCEI stocks oversold?

September 10, 2019 11:20
The Hang Seng China Enterprises Index is seen as a fairly good gauge of the overall health of China’s economy. Photo: Reuters

Trailing 12 months average price-to-earnings multiple of Hang Seng China Enterprise Index (HSCEI) stocks has slipped below the 8-mark last month, putting it lower than even the levels seen during the depth of the Asian financial crisis in 1998 and the global financial tsunami of 2008.

Hang Seng China Enterprise Index was first introduced in 1994. The historical P/E ratio of the index is around 12.

The index is composed of 50 Hong Kong-listed leading Chinese firms from different sectors, including financial plays like China Construction Bank and Ping An Insurance, as well as some firms  from utilities, industrial, healthcare, property development and consumer sectors.

It’s fair to say the index reflects the overall health of China’s economy.

The benchmark plunged below the 9,900 points level last month, down nearly 20 percent from the peak of 12,000 points seen in April. That came even as the index constituents posted double-digit growth in interim net profits on average.

Is the index oversold?

The sharp decline could be due to the gloomy sentiment amid Hong Kong’s social unrest, some observers have suggested. The argument, however, may not be totally valid given that Hong Kong business accounts for only a tiny portion of the overall profit of the constituent firms.

Others have pointed to China’s economic problems, such as pressure from the US trade war and a possible deterioration of corporate earnings going forward.

In that case, the currently low PE may be somewhat misleading. If we factor in weaker future earnings, the price-earnings ratio may be actually high.

This article appeared in the Hong Kong Economic Journal on Sept 9

Translation by Julie Zhu with additional reporting

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Hong Kong Economic Journal columnist