The Chinese stock market seems impervious to the travails of China itself, ignoring the ongoing war of words with Donald Trump on trade, the global pressures to rid the West of Huawei’s involvement in its infrastructure, accusations of misinformation re the Coronavirus origins in Wuhan, worldwide contempt for its stance on Hong Kong and much else beside. Indeed, the louder the global anti-China rhetoric becomes the greater heights the stock market achieves. Last week, after another strong rise over eight consecutive days, the Shenzen-Shanghai Composite Index approached its 2015 high point from which its last speculative bubble burst. That saw the market collapse, losing over a third of its value in less than a month and 46% before it began to stabilise in September of that year. Is history about to repeat itself?
Before trying to answer that question there are several things we must appreciate about the Chinese stock market and its investors. As was seen in 2015, the Chinese investing population are, by nature, gamblers. Five years ago most were relatively new to the investing game and had only seen a favourable upward trajectory in market values during their investing lives. Five years on perhaps they are less green and a little more cautious than first time round. Perhaps!
The Chinese government itself ought to have learned a lesson too, it having clumsily cut off too many sources of funding in 2015, effectively pulling the rug from under the market at its most vulnerable moment. However, it still has a massive impact on the stock market, not just laying the economic foundations upon which corporate China is built but orchestrating investment too. The Chinese state, as well as holding stakes in many of the listed companies, also directs investment by them and in them. In a clear attempt to take the heat out of the market last week, state-backed entities were trimming stakes, creating a market fall of around 2.5% at the end of the week. The state may want a slow and healthy bull market but its actions can, as was seen in 2015, be very heavy handed at times.
Capitalist nations generally regard state corporate involvement as something to be kept to a minimum, although the devastating impact of Covid on company finances is likely to move the goalposts in some industries, if only on a temporary basis. In China state involvement is the norm. Whilst to us in the normal course of events market values are determined by the coming together of buyers and sellers as supply and demand come into balance, that is not really the case when the state is directing play. The government is effectively deciding market values. That isn’t healthy and when the conductor misses the beat an unholy racket can ensue, as we saw in 2015.
As things stand I suspect the Chinese stock market still has some scope for further appreciation but we should now be looking out for warning signs. We should take Friday’s move as a reminder that, just like the Lord, the Chinese government giveth and the Chinese government taketh away – and not always intentionally. I would suggest portfolios that are overweight in China (and Hong Kong) should consider trimming holdings now with a view to further doing so if the rise continues over the coming months.
And the UK and US…
The UK stock market has become rather range-bound, the FTSE 100 Index having spent most of the last month hovering between 6,000 and 6,300. While all eyes have been focussed on the US markets, particularly the FAANG stocks that have been powering up the NASDAQ, it is easy to lose sight of the fact that their wider market has mirrored ours and shows a similar stubbornness either side of the 26,000 level. Whilst Leicester has been locked down again in an attempt to isolate a local Covid spike, its significance pales against the virus’s rampant growth in the US. It should be a reminder that the rises in these markets must be seen as a recovery in a continuing problematic environment. As yet we have no idea of the final cost of this pandemic, neither in terms of lives lost, jobs lost, businesses lost nor the financial cost to the state.
It is, therefore, fanciful to think that stock markets can ignore the consequences and roll straight into a bull market, in my view. I wrote recently that a day of reckoning is likely to come later this year when companies report on the current period. Those reports are unlikely to be pretty and could throw up some good buying opportunities in both the UK and US markets. Be sure to have some powder dry to take advantage.
Russell Dobbs FCSI
Chartered Wealth Manager