The S&P China 500 declined 10.5% during Q3 2021, succumbing to dramatic losses across consumer- and technology-driven companies. Performance also continued to lag the broader S&P Emerging BMI and S&P Developed BMI, which fell 6.2% and 0.4%, respectively.
China’s Underperformance versus Regional Peers
The index likewise trailed regional benchmarks YTD—the S&P China 500 was down 7.3%, while the S&P Hong Kong BMI declined slightly (down 1.8% YTD) and the S&P Taiwan BMI (up 18.4% YTD) and S&P India BMI (up 31.1% YTD) enjoyed robust gains.
Exposure to China-domiciled technology- and consumer-related sectors also contributed to the underperformance, as recent regulations and new listing requirements took hold. Broader emerging markets, meanwhile, tend to be dominated by more traditional sectors including Financials, Energy, and Materials, which lent support to returns.
Onshore stocks outperformed offshore listings YTD, as the S&P China A BMI gained 3.0%, compared with the S&P China ex-A Share BMI, which sank 18.4%. Given its diversified composition across all Chinese share classes and sectors, the S&P China 500 posted performance ahead of most major Chinese equity benchmarks, while somewhat lagging onshore-only indices YTD.
Sector Performance Favored Energy and Materials while Consumer and Info Tech Fell
Four of 11 sectors finished the quarter in positive territory, led by Utilities (up 21.1%) and followed by Energy (up 16.6%), as renewable energy companies surged on a shift in economic policy, and general increases for energy—from any source—coincided with global supply shortages. Meanwhile, declines in Information Technology (down 9.1%) and Consumer Discretionary (down 23.4%)—which together represent nearly one-third of the S&P China 500—contributed to over one-half of the index performance during the quarter.
Consumer-driven tech companies had the greatest negative impact on quarterly performance, as the performance of Alibaba (down 34.7%), Tencent (down 21.2%), Meituan (down 23.2%), NIO (down 33.0%), and Wuliangye Yibin (down 26.4%) affected the index heavily, together contributing over one-half of the overall index declines during the period.
Other notable themes included a surge in rare-earth mining companies—who supply to chip makers—which lifted Materials (up 32.5%), while the precipitous decline of property company Evergrande (down 71.0%) drove the narrative for Real Estate (down 9.5%) and reverberated throughout the economy.
Price Declines Led to More Favorable Valuation Metrics
The S&P China 500 trailing P/E reduced noticeably to 15.8x in Q3 (18.7x in the prior quarter), as prices declined, making for the third straight quarterly decline (20.5x for Q4 2020), nearing the 10-year average of 14.2x. Meanwhile, the rolling one-, three-, and five-year P/E ratios remained elevated compared with the longer-term average. The broad-based S&P Emerging BMI trailing P/E remained slightly more elevated in comparison, at 16.2x at the quarter’s end (20.5x prior). The S&P China 500 dividend yield, meanwhile, increased from 1.51% to 1.69% on a quarterly basis.
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