China's equity market is more valuable than you think

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Editor's note: Chen Jiahe is the chief strategist at Cinda Securities. The article reflects the author's opinion, and not necessarily the views of CGTN.

Only a few days ago, China's securities regulatory committee approved the opening of a mutual fund named the Rui Yuan Fund. This is a privately owned mutual fund, with its dominant shareholder, Chen Guangming, holding a 55 percent stake.

The market was excited and China Fund, the leading newspaper in China's asset management industry, reported this news with the first article on its front page.

Why is everyone so excited about a newly arrived fund that is privately owned and small? It's because its founder, Mr. Chen, is currently China's most legendary equity investor. The fund he previously managed at his last employer returned around 800 percent in just 10 years.

Although this record is booked before the incentive fees are deducted, it still means Chen has earned his fund holders a marvelous return over the past decade. While hundreds of billions of yuan are waiting for his next fund, it is reasonable that his new fund caught the market's eye.

At the close of trade, the Hang Seng China Enterprises Index was up 1.75 percent at 25,416 on November 1, 2018. /VCG Photo

For many years, Chen repeatedly articulated his investment strategy is value investment, the same philosophy that has been preached by people like Warren Buffett, Peter Lynch, and Howard Marks. Chen's success is incontrovertible proof against the rumor that “there is no value in China's equity market.”

While people have only a glance at China's equity market, they might only see that the Shanghai Composite Index dropped from 5,178 points in 2015 to 2,676 recently. A careless conclusion could be that “there is no value here and it is hard for investors to make money.”

However, if they took a closer look and calculated the later performance of investment targets that were sound and cheap in 2015, most of these companies have generated a positive return in the past four years.

A reason behind the occasional poor performance of China's equity market is its huge volatility. Unlike mature markets such as the US and the EU, China is still an emerging market.

Over 80 percent of the trading value is conducted by retail investors. Most of them possess little knowledge about the nature of business and valuation. They also trade frequently, normally around 50 percent to 100 percent turnover ratio per week, while global institutional investors usually trade as much in a year.

VCG Photo‍

However, such huge fluctuations in China's equity market offer wonderful opportunities that many veteran investors can only dream about. When the dictum of value investment is “buy low and sell high,” you can find much more incidents that fit into such criteria in an emerging market compared with a mature market.

Let me show you a vivid example of how much investors can earn in such a volatile market. The Christmas of 2002 was not a good time for investors in Hong Kong, especially those who bet a heavy stake on the mainland stocks, represented by the Hang Seng China Enterprise Index (HSCEI). The index had tumbled for many years since the 1997 financial crisis and there was no clear sign for it to pick up.

However, everything changed in the spring of 2003. For the next five years until 2007, the HSCEI rose from around 2,000 points to around 20,000. Furthermore, this is not just a tenfold return. The actual return is around 15 times since the HSCEI does not include any dividends given by companies.

In my 12 years of experience in China's capital market, I have found it is hard to predict the market's short-term (or even middle-term) movement. An emerging market can rise with a rising interest rate or it can fall with a rising interest rate. You can hardly link the market performance closely with fundamentals.

The only thing I am certain about is that as long as you buy good things with low prices and wait patiently, you will definitely be rewarded.

(If you want to contribute and have specific expertise, please contact us at opinions@cgtn.com)