This is a generational opportunity. The argument is as such:

In my view, China is the next financial ruler of the world. If you take a super long-term view, exposing yourself to China is the smart thing to do. You can read a book to fully understand this point: Ray Dalio – Changing world order. If you have ever been in China you will know: China is criminally innovative, competitive, skillful and effective. This not reflected in the current prices due to emotion, disbelieve and short-terminism. We are humans, after all. Hence PE ratio of Chinese stocks are historically very low: this means relative to other stocks (explanation below).

Risk considerations

• Consumer confidence and property prices in China are depressed and need time to recover.
• Due to the contrarian argument it might take time for markets (people) to (want to) realize this so therefore short-term returns might be low
• Not many people agree with this

PE Ratio explanation

Forward P(rice)/E(arnings) ratio: What is this? It is a metric that investors like to use to see whether a stock is expensive or cheap relative to its future earning potential.

US Stocks are currently trading at around 23x forward earnings, whereas Chinese (tech) stocks at around 11x. This means that for the same earnings (read: same value) US equities are around twice as expensive. This is even more true for US technology stocks often trading above 30x forward earnings.

The chart below shows that when stocks are expensive (high forward PE ratio), typically future returns tend to be low. On the other hand when stocks are cheap (low forward PE ratio), future returns tend to be high.

Many investors are left by this correlation with a difficult dilemma, how to make money in a high forward PE (read, expensive stocks) environment? Must I hold? Must I wait? In my opinion this is just the wrong question to ask. Why must you make your life difficult. Why not re-allocate to areas where upward potential is not yet depleted?

Further considerations and limitations of this analysis:

• The sharp person will have noticed, I just pasted a Chinese flag in US data… ;). Assumption: Chinese companies behave in the same way (I believe that to be more or less true)
• There might be good reasons for companies to have low forward PE ratios: such as the technology is inferior. I believe this not te be true for Chinese tech.
• The dataset has overlapping periods, this limits the independence and therefore the validity of this correlation, although I believe it is there on the basis of common sense and historical events: see for instance period of low returns after the dot com bubble bursting (similar valuations as of today), or periods of high returns in low forward PE times (post 2008 financial crisis crash for instance)