Key Takeaways
Despite extended periods of strong economic growth, China’s equity market performance over the past 30 years has been disappointing
The country faces significant challenges ahead, including demographic shifts, unpredictable state interventions, and persistently challenging relations with the West
Lack of prospective earnings growth and current valuations make China a puzzle for long-term investors
In our recent paper, Turning Tides in Emerging Markets, we sidestepped discussing China, as it did not align with the more optimistic views we have for most emerging market countries. In fact, this is the major emerging markets player giving us the most pause.
Despite the recent rally, the long-term story of investing in China’s public equity market has been far from rosy—so we felt it was worth taking a moment to reassess what we believe China means to the emerging markets allocation puzzle prospectively.
WHAT GOES UP…
Investing in China’s equity market over the last 30 years has, in many ways, been the ultimate Sisyphean trade—just when you think you have made it, you end up rolling back down the proverbial cumulative return hill. The proof point is straightforward: $1 invested in MSCI China at the beginning of 1993 would be worth (excluding dividends) roughly $0.80 today, in nominal terms, if that did not sting enough already.
MSCI China
With MSCI China now meaningfully off its 52-week low as of late February 2025, today’s setup feels like we are Sisyphus approaching the top of the hill again. Should we expect a different outcome? Has anything fundamentally changed about the economic or geopolitical backdrop to challenge what we see from history time and again?
While we are wary of falling prey to Gambler’s Fallacy, one would have to feel pretty cavalier to ignore China’s empirical mean-reversion tendencies and the fact that China’s most challenging years arguably lie ahead rather than behind it—be it the demographic headwinds, persistent and unpredictable state interventions, an ailing property market, or the Cold War-type relations with the West that not only persist but seem to be worsening with time.
Buy & Hold Annualized Excess Returns by Initial Investment Year: MSCI China vs. MSCI ACWI
MORE LOSSES THAN GAINS
Admittedly, it is a sobering observation that being majorly bullish on China at virtually any time since the early nineties has been doomed to fail. Over each year starting in 1993, had one bought into China’s equity markets and held through thick and thin until the end of 2024, all but three vintages yielded meaningfully negative excess returns, with a median outcome of roughly -600 basis points per annum. Even with near-perfect timing, outcomes did not exceed +20-40 bps per year, and that is before accounting for any measure of risk or volatility.
Now, that is not to say one cannot do better by adopting an active approach, to be sure, China has had its fair share of winners, a number of which we have owned on and off throughout the years. We would simply point out that the starting odds are poor, and empirics suggest China makes for an interesting trade at best, but its prospects for a longer-term investor taking a 3- to 5-year view are less obvious.
IF NOT THEN, WHY NOW?
Arguably the most gnawing question for any long-term investor is: if you were not rewarded with meaningful corporate earnings growth during China’s best economic periods, what gives you confidence that the future setup will be better? From the mid-1990s until the global financial crisis, China’s economic ascent, as measured by nominal per capita GDP growth in US dollar terms, was unparalleled—rising roughly six-fold compared to a less than two-fold increase globally. These gains stemmed from China’s integration into the global economy (e.g., their WTO accession in 2001) and deep structural reforms, which spurred massive infrastructure investments and rapid industrialization.
But even during this growth boom, investors encountered a dilemma where economic expansion did not translate into common shareholder returns, as the system was plagued with state control and structural issues. For instance, China’s state-owned enterprises have raised billions through IPOs and secondary offerings from 1990 to 2010, but these companies were not big on dividend payouts.
Indeed, they often funneled cash back into state priorities or retained cash for operational bloat, rather than distributing it to shareholders. More recently, private firms, especially tech giants, faced regulatory whipsaws as Beijing pushed for “common prosperity.”
Per Capita Gross Domestic Product
INVESTOR CAUTION ADVISED
Now, one cannot predict either China or US policy, but some data points seem to be ignored by investors. How can the details in the White House’s “America First Investment Policy”1 not give investors pause? Maybe folks have become numb to the rhetoric, but we struggle to find a silver lining for Chinese equity markets when we read:
The memo lists “the PRC, including the Hong Kong Special Administrative Region and the Macau Special Administrative Region” as “America’s ‘foreign Adversaries,’ along with ‘the Republic of Cuba; the Islamic Republic of Iran; the Democratic People’s Republic of Korea; the Russian Federation; and the regime of Venezuelan politician Nicolás Maduro.’” We feel we would be dismissive if we did not worry about the potential implications of such views.
VALUATION VS. REALITY
But let us say these concerns are overblown, and we look at China’s equity market through a valuation lens, putting all else aside. After all, there is something to be said about what price level makes an asset attractive. Here again, however, we find it difficult to picture sensible long-term investors doing the math and getting comfortable estimating any reasonable price for China today, given what we feel is the likelihood for low-to-no corporate earnings growth on a prospective basis.
Harking back to an earlier point: if investors were not rewarded during the best of times, why should we be any more optimistic today? Consider that over the last ten years, cumulative corporate earnings growth2 in China has been negative in US dollar terms, yet valuations3 trade in line to slightly richer today than back then.
That begs the question—what should one pay for what seems like a growthless perpetuity, which needs discounting at an increasingly aggressive rate to compensate for the festering geopolitical tensions and domestic economic challenges? In a vacuum, this may not be a bad asset, but at today’s earnings multiple, it hardly feels like a screaming bargain.
MSCI China vs. MSCI ACWI
Source: Bloomberg. Data from 27 February 2015 through 26 February 2025. You cannot invest directly in an index. PAST PERFORMANCE MAY NOT BE INDICATIVE OF FUTURE RESULTS.
END NOTES
1”America First Investment Policy.” The White House. 21 February 2025.
2 As measured by the cumulative US dollar earnings per price growth for the MSCI China Index in forward 12-month terms.
3 As measured by a forward 12-month price-to-earnings ratio on the MSCI China Index.
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