Apparently, everyone is presently nervous of the markets and is raising cash, although it would seem that Chinese investors “didn’t receive that memo” until yesterday, with the main exchange indices down 6%. The chart (Fig: 1) highlights how amazing a run the Shanghai index has had over the past 12 months, prior to Thursday’s volatility.
The Shenzhen composite is, or at least was, up over 100% year to date. Looking at the chart, the 175% return over 12 months is nothing to be sneezed at. In fact, if you add in the NASDAQ or even the high flying US biotech sector, its pales into insignificance against the Chinese indices.
A few weeks ago I was asked, on CNBC in Singapore, if Chinese stocks were overvalued and I replied with a rather cagey fair value comment. With a price to earnings ratio of over 100 and some stocks being up 1000’s of percent, fair value may, with the benefit of hindsight, seem optimistic. However, the second Bloomberg chart (Fig: 2) shows there may be still more upside in the tank when compared to the 2007 rally. Definitely not cheap, but momentum investors can push prices from overvalued to even more overvalued!
The head of our commodities boutique sent me the below cartoon earlier in the week and it reminds me of the human science that many call behavioural finance. Whilst the Shanghai and Shenzhen stock exchanges will undoubtedly be much bigger institutions in 20-30 years time, as capitalism develops, one has to wonder what the direct Cantonese translation is for “buy” and “sell“?
Take profits if you were insightful enough to time this entry right.