While one-third of the global population goes to the polls this year, the most notable elections for China are November’s US presidential election and those held in Taiwan on 13th January.
In Taiwan, while Lai Ching-te won the presidential election, his Democratic Progressive Party lost their majority in the "Legislative Yuan".
This outcome provides for a "check and balance", thus preserving the existing status quo between the island and Beijing.
Consequently, there was minimal market reaction post-election, a factor that could be construed as a "positive" development.
With the commencement of the US election campaign, we should expect increasing news flow on Sino-US relations, given that a strong stance on China continues to be a bipartisan consensus in the United States.
However, recent efforts by both parties to move towards a normalisation of relations are a welcome and positive step.
In conclusion, we maintain a cautious optimism towards Chinese equities, anticipating a more substantial market recovery during the second half of the year.
With a 12-month forward P/E ratio of 10.2x*, the MSCI China Index is currently trading nearly one standard deviation below its 10-year average.
Valuations of Hong Kong equities are even more depressed, with a 12-month P/E ratio of 8.8x* for the Hang Seng Index, corresponding to two standard deviations below its 10-year average.
Assuming there are no substantial revisions to earnings and a return to long-term valuations through mean reversion, this scenario could lead to an approximate 20 per cent upside for the MSCI China Index and a 30 per cent upside for the Hang Seng Index.
This positions long-term investors with an appealing entry point and serves as a buffer against further significant downside risks.
David Townsend is managing director of the EMEA Business at Value Partners Group
