About Me

Retired chief investment officer and former NYSE firm partner with 40 years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Saturday, June 20, 2015

China Stock Market

I made a nice call on China stocks in Jun. 2014. The key premise was that a slowing economy
would lead the PBOC to ease monetary policy and re-liquify the system. I believe that longer
term, the Chinese have preferred to invest and speculate in real estate, and that the destruction
of the China stock bubble going into the 2008 - 2009 global recession only served to reinforce
the preference for real property. The weakness in the residential real estate market over the
past year was partly a result of tougher policy by official China in the real estate area, so when
China began to ease monetary policy in late 2014 and encourage equity investment, the change
in policies left real estate to languish and invited speculative spirits back into equities. This
was a pleasant surprise for the equity market since monetary policy has not been strongly
accomodative at all by China standards. So, net - net, mild easing plus changes in official policy
has lead to a windfall for stock players. GXC (With The Shanghai in the top panel).

It is interesting that the PBOC's change to ease has been moderate and controlled, for it is
likely not strong enough to trigger heavy speculative lending to business and real estate as
seen in the past. In this regard, since the new easier money policy has been slow to roll out,
improvement in China economic performance has been deferred until Half 2, 2015.

Over the years I have mentioned  that when The Shanghai is strong, the action can get wild
and undisciplined. The chart above, which features the S&P ETF of a broad index of investment
grade equities (GXC), looks tame in performance compared to the wild and wooly Shanghai
shown in the top panel of the chart. With the GXC there has been a  major tradeoff of volatility for
positive return against the Shanghai in a strongly positve market environment.

The GXC has been in bull mode since late 2011 and its pattern more resembles the SPX than the
Shanghai. The recent jump in price to $100 for the GXC brought it closer to its all - time high
of 113 set in the bubble high of late 2007. The stock has been correcting, but it remains mildly
extended and overbought. Earnings have progressed over the last seven years, so the stock is
much cheaper than it was at the peak in 2007.

It is good that China has embarked on controlled money and credit easing, and that from a
policy point of view, it is trying to encourage a larger, more liquid equities market. China has
also curbed its mercantilist impulse and seeks to diversify its economy away from excessive
emphasis on industrial development. I am hopeful that with slower growth the populace
can adjust its expectations calmly and will not require the authorities in Beijing to sop up
anger with nationalism and a round of regional imperialism.

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