MW Why this strategist still says U.S. stocks should trade at a premium to China's

By Steve Goldstein

The Trump administration is damaging the greatest strength of the U.S., according to veteran analyst

As a sign of the times, the Chinese government's reported move to block BYD from setting up a factory in Mexico - on fears its technology could get stolen by Americans - is representative of how the world's second-largest economy is no longer just a source of cheap labor but every bit a rival in the most advanced innovations.

That view has been mirrored in markets this year, not just between BYD (HK:1211) and Tesla $(TSLA)$, but between the U.S. and China stock markets overall.

The iShares China large-cap ETF FXI has gained 26% this year as the S&P 500 SPX has retreated by 4%.

So Viktor Shvets, the global strategist at Macquarie Capital, asked the very fair question of whether the still-enormous gap in valuation between the S&P 500 (at 20 times earnings) and China (at 11 times earnings) should continue.

He argued it should. But first, he pointed out the tectonic shifts over the last two months.

"An ill-defined concept of 'national security' has become the go-to rationale for aggressive state actions and a significant narrowing of scope for judicial or legislative power. While it is far more extreme in China, in the last two months there was a curtailment in the U.S., arguably of a greater magnitude than during Nixon's presidency and perhaps even on par with McCarthy era," according to the strategist who's been in the industry more than four decades.

Shvets said the Trump administration is damaging the greatest strength of the U.S.: intellectual capital. "The chaotic changes in trade and immigration policies as well as cuts in support for fundamental research are prompting freezes in programs, while also causing angst for international students and researchers," he noted.

Similarly, when it comes to American soft power, there are now fewer differences between China's "Wolf Warrior" diplomacy and aggressive militarization of the South China Sea, compared with threats of U.S. attacks on Greenland, Panama and Canada.

So why are American assets still valued more? One difference is the U.S. can still add labor and capital while growing productivity. China has no way of adding labor, and it's already consumed too much capital.

"Even adjusting for [purchasing power parity], its labor productivity is less than 25% of the U.S., and domestic productivity is even lower. It will take considerable damage to U.S.'s institutional pillars to reverse this," he said.

Another point is that U.S. companies are delivering the world's highest return on equity, profit margins and free cash flow. Meanwhile, China's return on equity has declined to 9% from 20% in 2010, and margins are under pressure, he said. Even isolating for growth and tech sectors, American companies enjoy a considerable advantage in returns.

Furthermore, the dollar DXY remains the global currency of exchange and value, and unlike China, there are no capital controls.

"Thus, U.S. equities still warrant a quality and growth premium. But, the extent will depend on U.S. and China policies," he said.

-Steve Goldstein

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March 19, 2025 10:17 ET (14:17 GMT)

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