It Was a Lost Decade for China’s Stock Market, but Investors Bet on Better Times Ahead - Wall Street Journal

The Shanghai Composite posted a loss for the decade. Photo: Swen PföRtner/Zuma Press

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Steven Russolillo

Steven Russolillo
The Wall Street Journal
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Jan. 4, 2020 5:30 am ET

As Chinese stocks close out a lost decade, many global investors say the future looks brighter.

The flagship Shanghai Composite Index dropped 6.9% from Dec. 31, 2009 through Tuesday’s close, making it one of the rare indexes that finished the 2010s in the red. Meanwhile, the S&P 500 nearly tripled, Japan’s Nikkei 225 more than doubled and Europe’s Stoxx 600 jumped by 64%. The figures don’t include dividend payments.

Only a handful of other stock indexes posted losses over that period on a price-performance basis and in local currency terms, according to a Dow Jones Market Data Group analysis of FactSet data. These included benchmarks in Portugal and Spain, while one in the Czech Republic was flat.

In the last couple of years, the Shanghai market has struggled with the U.S.-China trade war and slowing domestic growth. Those challenges came after the market’s furious boom and bust in the middle of the decade.

Other major markets have struggled for long periods too, including the U.S. in the inflation-plagued 1970s, or post-bubble Japan in the 1990s. But the poor returns in China are particularly striking because they contrast with such robust growth: the country’s leaders are aiming for the economy to be twice as large by 2020 as it was in 2010.

Investors and strategists say there is room for optimism this year and beyond, particularly as institutional capital, both Chinese and foreign, plays a bigger role. That could prompt a push for better corporate governance and a clearer focus on shareholder returns.

“This is still a retail-driven stock market,” said Eric Moffett, a portfolio manager at T. Rowe Price in Hong Kong. “We believe that will change and because we’re at a sentiment low, we think it creates a lot of opportunities.”

Low but rising foreign ownership of Chinese stocks is one reason Mr. Moffett thinks the market should perform better in the years ahead.

Only about 3.1% of China’s locally listed stocks are owned by foreign investors, compared with 22% in the U.S., 30% in Japan and 38% in the U.K., according to data compiled by T. Rowe Price. China’s growing presence in influential global indexes, such as MSCI Inc. and others, is likely to draw in more international investment.

Mr. Moffett also pointed to cheap valuations. He said two metrics he closely follows for Chinese stocks—trailing price-to-earnings and price-to-book ratios—sit well below their long-term historical averages over the past 15 years.

China’s market has long been derided by its critics as a casino dominated by individual investors, known in the business as retail investors, making it prone to both sharp rallies and steep declines. Looking past that volatility, investors and academics cite a range of reasons for poor long-term performance.

Many publicly listed companies, particularly state-owned enterprises, are inefficient, and corporate governance historically has been patchy. The government can also distort prices, as in 2014-15, when it encouraged a furious stock rally. The market then almost halved in just over two months.

Adrian Mowat, chief strategist at CLSA, said Chinese investors had tended to treat stocks as speculative plays, rather than adopting a “buy-and-hold” strategy.

Some fund managers say this mind-set creates a favorable environment for the growing number of active professional investors in the market, making it easier for them to beat their benchmarks in China than in other parts of the world. By comparison, active managers have struggled for years in places like the U.S., where a wave of money has shifted into passive funds that track index performance.

Another factor holding China’s local stock market back: Many of its biggest, fastest-growing companies don’t trade in the mainland. These include e-commerce titan Alibaba Group Holding Ltd. and internet giant Tencent Holdings Ltd.

Together the duo are worth more than $1 trillion, with their value soaring in recent years. Tencent trades in Hong Kong and Alibaba made its debut in New York in 2014 before adding a secondary listing in Hong Kong in November.

The more technology-focused Shenzhen Composite Index tracks the performance of stocks in China’s second onshore financial center. Unlike Shanghai, it rose 43% over the past decade.

Chinese authorities are pushing to win more local listings for tech startups. They launched the Star market in Shanghai in 2019, which imposes less onerous demands on companies going public than a traditional onshore listing.

Still, even if companies do become more efficient and more focused on returns, they can no longer count on superfast economic expansion to underpin their growth.

Helen Qiao, chief Greater China economist at Bank of America’s BofA Global Research division, said she expects Chinese growth to slow to 5.6% in 2020, below consensus forecasts of about 6%.

She is concerned that the government hasn’t done enough lately to boost growth, and optimism about the latest trade deal could fade. “With policy makers falling behind the curve, we think there is further downside risk to growth,” she said.

Share Your Thoughts

Chinese stocks fell in the 2010s, while the U.S. stock market nearly tripled. What are your predictions for both markets in the 2020s? Join the conversation below.

Write to Steven Russolillo at steven.russolillo@wsj.com

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