Wednesday, March 25, 2015

China equities - why are they going up?


The China stock market was up 49% last year and over 11 percent this year for a gain of almost 80% in local term since July 2014. Now this is a bull market. So you would think that the economy is roaring higher, but it has actually slowed to the lowest growth levels since the financial crisis. Earnings are not great, industrial profits are showing negative growth and the overall economy may just grow at 7 percent this year. Money and credit have been growing but a close look at the numbers would suggest that capital outflows are softening the action of the central bank, so it may actually seem tight.




What we are seeing is a one time shift in savings into the stock market. Brokerage accounts are growing at an ever faster pace as money is moved to stocks. The savings rate has been extraordinarily high in China and given the financial repression of capping deposit rates, there has been limited places to earn a healthy return. Real estate has been the investment of choice, but many are now switching to stocks and this is a catch-up effect. This does to mean that prices will be rational. The supply of stocks is limited relative to these savings flows so we are seeing a portfolio rebalance pricing effect. This shift from deposits to  stocks will not occur overnight and the flows could reverse given the fickle nature of new investors, but every investor should be prepared for more volatility and big swings in China equity markets. Regulators may not like the leverage being used and the number of new investors entering the market, but trying to stop this market may not be positive for a government already grappling with a large number of economic problems. This is a stock market to watch.

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