Mainland equities will come round - someday
Though mainland equities underperform, they'll someday match the global norm
equities always outperform other asset classes over time.
Lesson number two: this rule does not apply to China.
That is the finding of the . The report tracks investment returns from 23 countries, using data that goes back as far as 114 years.
Giles Keating, one of the authors of the report, says that if you bought any held American equities for any continuous 17-year period, you would have generated returns that beat inflation.
This holds true for virtually all markets: if you track the returns of a global equities index, shares would eventually outperform other markets and produce inflation-beating returns.
The data picture for China is complicated by the fact that it adopted a meaningful market only in the 1990s. Credit Suisse addresses this problem by looking only at data that goes back to 1993. But just going back to 1993, the report says if a person invested in China equities for that whole period, they would today have only 40 per cent of their money, after adjusting for inflation.
"However you slice and dice it, the returns of Chinese equities since 1993 have been disappointing," said Keating.
These equities have recently gone through another patch of underperformance, and the outlook is only getting poorer with all the recent news about declining economic growth on the mainland. Two fairly extreme views have developed about the market: one is that the economy is floundering and that the banking system is careering towards crisis, and the other is that Chinese equities are so cheap that they make up a once-in-a-lifetime buying opportunity.
Keating won't predict where these equity prices will go in the next 12 months. His research compels him to take the long view that the equities will eventually outperform other assets.
His data shows there is no correlation between the growth of a country's gross domestic product and share price gains. Key indices tracking stock markets in the United States and Britain routinely outperform the GDP growth of those nations. Mature companies listed in those markets tend to invest abroad, which mean their performance and that of their home market are unrelated.
China's market is made up of a lot of young companies that tend to invest for growth rather than profitability.
However, as Chinese companies mature, they will start investing more abroad. The firms will be more international, with better governance, more dividends, better brands, greater sales diversity and less exposure to the whims of mainland economic policy -all while China has its GDP slowdown.
Keating's point is that as China moves to a more market-driven economy, it will eventually conform to long-term global trends.
"The system is moving to a more market-determined system for credit," Keating said. "Let's assume that the process gradually continues, and so, for the Chinese economy over time, it becomes more appropriate to apply lessons from elsewhere. These lessons are that you do get strong equity returns over time."
