The Chinese stock market is seeing valuations collapse in the new year, increasing the pressure on shares of some of the most reputable companies in the world’s second-largest economy.
After years of losses for the Hong Kong-based Hang Seng Index and other mainland indexes, steep declines in January are driving a debate on Wall Street about whether Chinese shares are cheap enough to warrant investment.
For example, Alibaba Group Holding
BABA,
+7.85%
is currently trading at a forward price-to-earnings ratio of around eight, its lowest level since its 2014 IPO, according to FactSet data. Despite a 6.9% increase to around $73 a share on Tuesday, the question remains whether it’s the right time to invest.
Tom Essaye, founder of Sevens Report Research, believes that Chinese stocks have suffered from several self-inflicted wounds and that evidence of a commitment to stimulate growth or reduce regulatory interference is necessary for a lasting rebound.
As Essaye explained, Chinese stocks have been struggling for years, and the selloff is starting to look overdone. However, he still believes that the companies may not be an obvious “buy” at their current valuations.
According to Essaye, significant stimulus from the People’s Bank of China and a more business-friendly approach from Chinese authorities are necessary to change his mind and encourage long-term foreign investment.
Despite the difficulties, opportunities remain in the iShares China Large-Cap ETF, which includes profitable, established technology giants like Alibaba Group Holding Ltd.
BABA,
+7.85%,
JD.com
JD,