Analysis: Elusive China equity returns now face growth slowdown

Tue Apr 24, 2012 1:53pm EDT
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By Sujata Rao

LONDON (Reuters) - Investors who have endured two decades of miserable stock market returns in China may have to wait a while yet for their bets to pay off as turbo-charged economic growth runs out of steam and a new economic model starts to evolve.

China has been the global economic success story of the past decade, booming at double-digit growth rates to establish itself as the world's second largest economy and hauling up a host of regional and commodity-rich economies in its wake.

Unsurprisingly, a lot of money has been staked on a belief that growing wealth in emerging markets and consumer demand for cars and computers will translate into handsome profits. Nowhere is that more true than China, to which funds tracked by Boston-based EPFR Global have channeled over $50 billion since 1995.

Yet given the scale of China's economic transformation and its indelible global impact, equity rewards have been abysmal.

A fund manager who invested in MSCI's China index at its launch in 1993, seeing 10 percent-plus annual GDP growth as a sure-fire guarantee of corporate profits and equity returns, would actually have lost 9.5 percent over that time, Thomson Reuters data shows.

Cash committed to stocks in the sluggish West would have returned almost 300 percent in the same period, while an investment in MSCI's emerging equity index would have increased four-fold in value.

The reverse has been true for bricks-and-mortar investment. Returns on foreign direct investment (FDI) into China are among the highest in the world, at more than 10 percent in every year since 2005, according to data from the United Nations.

Buying shares in U.S. firm Apple, which produces in China for export, was thus probably a better proxy for Chinese growth than local stocks.   Continued...