Date: April 8, 2015
The lack of economic fundamentals behind frothy equity markets in China may not automatically mean the end is nigh, but rather investors should take care not to end up as the last one dancing when the lights are switched on.
There has been considerable interest in Chinese equities lately – and rightly so. The benchmark Shanghai Composite (SSEC) was propelled past 3,800 points to its highest close (31 March 2015) since March 2008. Pure A-share indices were not spared from the upbeat mood either. FTSE China A50 remains poised to test psychological barrier at 12,500 and Shanghai Shenzhen CSI 300 Index stays in lockstep with SSEC, comfortably past 4,000. The bullishness was driven by a union of factors. Government action, in particular monetary easing, coupled with perceptions of low valuations, fuelled the exuberance in Chinese shares. This is worrying because it signals an absence of solid fundamentals underpinning the recent stock rally.
Earlier gains in November and December last year were attributed to the surprise People’s Bank of China (PBOC) rate cut and the launch of the Hong Kong-Shanghai Stock Connect. Perceived bargains in equity was another reason cited for the bullishness. At the end of 2013, the price-to-earnings ratio (P/E) of SSEC, A50 and CSI 300 indices were at 10.3, 7.3 and 10.6 respectively, compared to 12.1 (P/E) in the MSCI Emerging Markets Index (MSCI EM). Since then, the P/Es have shot up to nearly 18.0 (SSEC) and 17.2 (CSI 300) in late March 2015, while the A50 rose to 11.1. P/E for MSCI EM was steady around 12.0 in the same period. |
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