Chinese equities are not as cheap as they seem because the nation’s economic slowdown has weakened corporate earnings, making it imperative for investors to screen stocks and sectors carefully to pick winners, according to JPMorgan Asset Management.

While they traded at 14 times historic earnings in line with the average valuation over the past decade, investors were getting less oomph from the current scenario because the return on equity was faltering due to weaker profitability trend, said Mark Davids, co-head of Asia-Pacific equities.

“It’s very difficult to argue that Chinese equities are particularly cheap,” he said in an interview on Friday. “You could argue that the average of the past 10 years should not be reflective of where the market should trade as fair value. For there to be a re-rating, you need an improvement in the profitability of Chinese companies and that’s difficult to come by if the economy is very weak.”

Chinese stocks under the US money manager’s coverage have an aggregate annual expected return of about 10 per cent, which is not as compelling as the historic average of around 20 per cent, or the superior returns offered by companies in South Korea, he added.

The appeal may not be that great now since Chinese stocks have rallied this year. The MSCI China Index, the broadest measure tracking more than 700 Chinese companies listed at home and abroad, has returned 14.7 per cent, according to Bloomberg data, while the S&P 500 has gained 2 per cent over the same period.

Global investors remained underweight on Chinese stocks, Morgan Stanley said in a report over the weekend. Their allocation was about 26.6 per cent, versus the 29 per cent weight of Chinese stocks in the MSCI Emerging Market Index, the widest gap on record, the US investment bank said.