by Steve Visscher, Mawer Investment Management
Just for fun I googled “China’s economy”. It yielded pages and pages of articles discussing the impressive growth rate of the Chinese economy. Even after growth has slowed in recent years, much has been written about how China’s growth remains amongst the highest in the world. Strangely, I found very little coverage of how Chinese stocks have performed. The evidence might surprise you.
From 2000 to 2007, the Shanghai Shenzen Index approximately tripled in value. Those were great times. Then the global recession hit in 2008 and all of that positive growth very quickly disappeared. Global markets bottomed in March of 2009, before quickly recovering later in the year. China followed a similar path.
But after 2009, China began to diverge. Global equity markets had positive returns in 2010, and 2011, and are well on the way to healthy gains in 2012. China’s Shanghai Shenzen Index has had negative returns in each of these periods.
We think this highlights the disconnect between the health of an economy, and the return potential of the companies within it. Identifying China as a “fast growing economy” does not take any great skill or insight. Any investor can read the economic data and reach that same conclusion.
But a rapidly growing economy does not automatically make Chinese companies attractive investments. It doesn’t mean they are well-managed companies. It doesn’t mean they have acceptable levels of risk. And it does not mean they are attractively priced. In fact, some investors become so enamoured with the media attention towards a “hot” economy that they compromise their philosophy or discipline just to make sure they can participate. This behaviour simply exacerbates the problem. Overvalued companies become more overvalued. High risk ventures or poorly managed companies receive more capital, rather than less.
In time, reality sets in. This helps explain why so many of the best-performing companies in recent years were headquartered in “troubled” economies like Europe or the U.S., while investments within the world’s “leading” economies have lagged. This has happened before and is bound to happen again.
Resist the hype to invest directly in the latest hot region or sector – it may not pay off as expected.
Steven Visscher
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