Email of the day
"Like you I am a China enthusiast and I am sitting with my finger on the buy button, but right now the charts I watch are giving confusing signals. The Hang Seng (HSI) is quite bullish with higher highs and higher lows, the Hang Seng China Enterprises (HSCEI) is quite supportive at the top of its recent trading range, the Shanghai Composite (SHCOMP) is at the bottom of the trading range established since late July and the FTSE Xinhua Bank Index (XA81) looks horrible. Can you shed any light on this or am I just looking at the wrong charts?
"Regards and thanks for the excellent service."
David Fuller's view Thanks for your comments and no you are
not looking at the wrong charts.
The lull
in China's stock market performance is all about supply, not the economy and
certainly not valuations. The impact of this supply has changed valuations and
it does not fall equally across all indices.
Much
of the supply concerns huge IPOs, mainly by banks. The reason for this is that
China provided a very strong monetary stimulus for the economy following the
2008 crash. However China's economy experienced no worse than a temporary period
of slower GDP growth before rebounding strongly once again. Too much of the
excess stimulus went into property speculation. Determined to rein this in,
China raised reserve requirements for banks, so that they could pass a stress
test based on a hypothetical decline in property prices of 60%. The only way
banks could do this on schedule was by very large, world record public offerings
of stock. I have discussed this on many occasions.
This
supply is responsible for the Bank
Index's underperformance. Bank shares also have a significant weighting
in the Shanghai Composite Index. Additionally,
the government has released more A-Shares (originally, all companies were government
owned) which were not previously tradable. The particularly heavy supply from
bank IPOs and also government held A-Shares has been evident since July 2009.
These latter offerings are released by schedule and the quantity declines sharply
following November 2010, as you can see in a report
published by Eoin on September 3rd. You may wish to read at least the Investment
Summary on page 3 and see the Table on page 23.
It certainly took me a while to realise the extent of this supply situation
but the benefit for subscribers interested in buying China today is that valuations
are much more reasonable as you can see from this historic PER
chart for SHCOMP, which I have showed before. The message is clear: it has
paid to buy China at these historic multiples. Forward multiples are estimated
at closer to 11. The HSCEI and HSI
Indices have not been weighed down by supply to anywhere near the same extent
and I think performance will improve in line with the global trend. You will
see why if you look at large-cap individual charts of HSI constituents, such
as Hutchison Whampoa.