For several reasons China's A-shares equity market is unjustly undervalued and deserves more attention from investors, the firm says.

China’s A-shares market may have won a boost late last week from index group MSCI but the sector trades around “crisis levels” in valuation terms, creating a “compelling” buying opportunity, according to T Rowe Price.

A selloff to the market last year, encouraged by decelerating Chinese domestic growth and worries about the impact of a trade war with the US, have taken mainland China share valuations down sharply. At present, shares trade about 10 times earnings, compared with 16 times a year before.

“In the 15 years I have been investing in emerging markets, I have never seen greater inefficiencies than I see in the China A-share market today,” Eric Moffett, a portfolio manager based in Hong Kong for the firm, said in a recent note. 

“China’s A-shares are at crisis-level valuations, striking for an economy still growing faster than most places around the world. Such valuations provide compelling investment opportunities for the long term,” he wrote.

In 2018, the MSCI China A International index of shares fell by more than 30 per cent. The MSCI World Index of developed countries’ shares fell by 8.7 per cent, underlining how China’s stock market, once one of the hottest, went off the boil sharply last year. 

More positively, however, investors around the world are likely to pump more money into mainland China A-shares after MSCI said it would boost the “inclusion factor” of these equities to 20 per cent from 5 per cent in a three-step process. Several investment firms said that this would buoy the market. The T Rowe Price comment was issued before the time of the MSCI announcement late on 28 February.

Moffett said that the market is unfairly valued. “Despite trade tensions and a slowing economy, there is a positive case to be made for China’s A-share market, aside from valuations. Household income continues to grow 10 per cent a year and the government continues to hike minimum wages,” he wrote. 

“Furthermore, due to demographics, there is a shortage of skilled blue-collar workers. The income growth of the average household matters much more to earnings than the GDP of the overall economy. There are a lot of very good companies in the deep A-share market, but many remain hidden from the gaze of foreign investors,” he continued.

“As a retail-driven market, information is not often published in English, nor are investor roadshows a feature of corporate activity, meaning only a small percentage of the market is owned by foreign investors. This represents a great environment for finding mispriced opportunities. Of course, poor quality companies in the A-share market are present, particularly down the market-cap spectrum,” Moffett said. 

“However, it is possible to find blue chip companies, growing by around 15 per cent a year, at very reasonable valuations. This level of growth may be less attractive to local investors, but for the astute investor, these are quality companies with sound balance sheets and good dividend profiles,” he said. 

The most promising areas are in cyclical and trade-related sectors in China that have crashed and for which earnings expectations and valuations are very low, such as autos, property and trade-related companies, he added.