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Which would you rather own right now: U.S. stocks or Chinese stocks?

The answer seems obvious. Wall Street has been hitting new highs, riding a red-hot economy. In contrast, the CSI 300 index of big Chinese companies has slumped more than 20 per cent since late January amid trade frictions with the United States.

But this comparison isn’t quite as one-sided as it first appears. Investors who are betting everything on North America may want to consider the possibility that this is a better time to put money to work in Beijing than in New York.

One excellent reason is that Chinese stocks are cheap. After their recent declines, they trade at multiples 40 per cent lower than their U.S. counterparts.

In a note last week, Derek Holt of Bank of Nova Scotia’s economics team pointed out that Chinese stocks are changing hands for 10 to 13 times their recent earnings. They are now roughly as cheap as they were during the global calamity of 2008, and far, far cheaper than the U.S.-based S&P 500, which goes for about 21 times earnings.

“Are Chinese firms really of as little value as in the midst of the global financial crisis?” Mr. Holt asked. His answer: “Seems to me that one shouldn’t ignore the possibility that Chinese stocks are a bargain for the longer-run value investor relative to pricey U.S. stocks.”

Valuations aside, investors in the Middle Kingdom could benefit from an upcoming jolt of economic stimulus. While investors have been focused on potential damage from the Chinese-U.S. trade war, many observers expect Beijing to cushion any repercussions by taking measures to goose its economy.

Looking at the longer-term picture, a bet on Chinese stocks would seem to reflect a rational sense of where industrial strength now lies. “China already has factories that put to shame what exists elsewhere in the world,” Mr. Holt declared. In contrast, he noted, “U.S. industrial policy is erecting barriers while seeking a return to the past, coddling its old industries and ignoring the bigger global picture.”

He is not the only one to be concerned about U.S. trade policy and, more broadly, the outlook for the American economy. The U.S. yield curve, a measure of how short-term interest rates compare with long-term rates, has become an object of obsessive fascination for economists and traders in recent months, because it is verging on “inversion” – an unusual state in which short-term borrowing rates move higher than longer-term rates. Over the past few decades, inverted yield curves have been a reliable indicator of U.S. recessions ahead.

The sizzling performance of U.S. stocks this year is largely the result of share buybacks by companies that have repatriated profits from abroad, according to Danielle DiMartino Booth, chief executive of Quill Intelligence LLC in Dallas and a former adviser to the Federal Reserve Bank of Dallas. She is concerned about weakness in both the U.S. housing market and auto sector, two areas that tend to lead the economy. “People forget that last year the U.S. auto industry was in contraction before Hurricane Harvey made landfall in Houston,” leading to a surge in replacement demand, she said.

The massive tax cuts unleashed by Congress late last year have given the U.S. economy a second lease on life. However, the benefits of that stimulus are likely to fade by the middle of 2019 as the Federal Reserve raises rates to fight inflationary pressures. The Fed is nearly universally expected to agree on another hike at its meeting on Wednesday and appears intent on tightening even more next year.

“World markets have reacted very poorly to the tightening cycle in the United States,” Ms. Booth notes. “In fact, the only country that has not succumbed to the tightening cycle is the U.S. itself.” The American immunity to its own interest rate medicine is unlikely to last, she said. Several Wall Street firms are now warning of the possibility of a U.S. recession in 2020. What that really means, she said, is that “they’re internally budgeting for [one in] 2019.”

All of this should make investors wary. Jeremy Hale at Citigroup is among those who acknowledge there is good value in emerging-markets assets. He argues, however, that there isn’t quite enough distress yet to make them obvious contrarian buys. In contrast, “in the near term, it’s difficult to see a major correction [for U.S. stocks] when earnings growth is so strong.”

Fair enough. But those who are investing with an eye to the next couple of years may want to consider the strong possibility that the best of U.S. earnings growth is behind us. If so, unloved Chinese stocks could offer a useful counterbalance to Wall Street.

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