There is Always a Bull Market Somewhere

China’s recent quarterly GDP Growth numbers came in at a 7% level. This is disappointing for some that recall the prior decade when it was twice this level.  Yet this bad economic news has not seemed to affect their stock market. While North American Markets seem to be stuck in a trading range of late, the Shanghai Stock Market Index is up 10 per cent just this month. It is up 50 per cent for the year, and just over 100 per cent over 12 months. Below you can see the 5 year chart of the Shanghai Composite (China stockmarket).


The past week it’s been the turn of Hong Kong’s large cap index which surged 10 per cent. This is a bull market of such scale and veracity that is impossible to ignore given the sheer numbers involved. On Friday, April 10, $US250 billion of Chinese stocks changed hands, which represented more than the combined value in the U.S. equity markets.


But the frenzy that is the state of the Chinese share market naturally has Western investors scoffing that the epic flow of ‘dumb’ money into Chinese stocks is at odds with fundamentals and is fuelling a speculative bubble.


They have a point. There’s real evidence to show that the new wave of investors in Chinese stocks, on paper, is not that smart. A well-circulated Bloomberg briefs graphic breaking down the level of education attained shows that investors piling into the market today have on aggregate a lower level of education than the previous vintage of speculators. The number of punters with a high school degree or less now accounts for more than half of new investors, compared with 26 per cent of existing investors.


These non-believers also likely don’t understand the politics behind the markets.


The Chinese authorities are obviously motivated to support their markets and there is/was a series of put [option], betting against Chinese assets.


The Chinese authorities dealt with this by implementing some key regulatory initiatives - directly relating to the stock market, and it has really caused the Chinese stock markets to head for the sky.


The big-bang moment has been the introduction of the Hong-Kong Shanghai “Connect programme”, that has allowed investors in each market to buy securities in each market. Chinese onshore punters can now buy the big Hong Kong stocks while foreign investors have access to onshore stocks.


It now seems like this has turned into the watershed event it was billed as in transforming China’s capital markets. If China is indeed adopting a more Western-style financial system where markets rather than policymakers play the central role in allocating capital, there’s no better way to encourage more capital to flow into the markets than through a rampant bull market.


After the recent stampede, are Chinese stocks now excessively valued? Well they’ve certainly been more expensive. Even after a 27 per cent surge since the start of the year, the Hang Seng index is still 13 per cent off its peak that was reached in late 2007.  Also relative to other global comparisons, their valuations are not out of control.


So there may be additional room to rally. When this ride stops, do investors have the tools to know when to get off, and hop onto the next ride?