Fidelity China Special Situations (FCSS ) fund manager Dale Nicholls expands on his point about the cheap valuation of China’s stock market, pointing out shares in the country trade on just 10 times earnings, which he says doesn’t reflect the rapid growth in profits that is superior to the US, for example.

This is the third excerpt from our virtual event with Nicholls earlier this month. If that has whetted your appetite, watch the other excerpts or the whole one-hour Big Broadcast, which includes a full transcript, the manager’s presentation and answers to questions from Citywire’s Gavin Lumsden and the audience.  

Can’t watch now? Read the transcript

Dale Nicholls:

So, of all the things that we’ve talked about, I think the most compelling story here is around valuation. You can see where the valuations are on earnings and on price to book versus history. So, if MSCI China are on about, I think, 10 times forward earnings, that’s roughly about one standard deviation off, or close to one standard deviation off, historical levels. I think also worth highlighting that discount to other markets. So here we’re showing that discount to the US and we’re at those historical peaks or the highest discount that we’ve seen versus the US. I don’t think this reflects growth prospects. For MSCI China, we’re looking at probably earnings growing high teens this year. When I look at those forecasts for the US they’re closer to flat and we’re looking at probably teens growth again next year.

People may question whether those numbers are real and we have seen some downgrades, but actually, of late we’ve seen more upgrades and in the first quarter we still grew earnings 20%. So we talked about some of the cost-cutting that companies had done through this slowdown and definitely I think that’s improved the cost basis of a lot of companies and that’s what’s helping actually drive earnings growth. So you’re looking at a market at a significant discount to peers, that actually has decent prospects in terms of earnings growth. With that optionality we talked about the consumer and how they’re positioned, I think that feeds into a pretty interesting opportunity set. So I’m definitely finding more value on the market and that’s what’s making me more positive on the outlook.