среда, 10 октября 2012 г.

Bulls in the Land of the Dragon - a Macro picture

Access to the Chinese equity market can be through two separate channels - one in Shanghai, and one in Hong Kong.

The Hong Kong market is the most established, most liquid, most accessible than the other, however these attributes may be a reason to look at Shanghai.

Most domestic Chinese investors trade only on the Shanghai market, and only 1% of that market is made up of foreign investors. This is due to tight restrictions put on the local market by the Chinese regulator, whereby foreign investors must be QFII (Qualified Foreign Institutional Investors). 

However these tight rules are likely to be relaxed in the near future and this is expected to result in inflows of between $100bn-$00bn into the market.

 Add to this the fact that the personal savings capability of the Chinese is estimated at a staggering $6 Trillion (that's more than 14 times the amount of personal savings in the United States), and that the Chinese government are actively discouraging speculation in the property market, we believe that a great deal of this money will filter through into the broader stock market.

Indeed one analyst believes that if the Hong Kong market increase by 30-50%, then he would expect a corresponding rise in the Shanghai market of 300-500%.

 So we prefer 'onshore' China funds as opposed to Hong Kong.

But what of the actual market?

Well, we believe there are a number of compelling factors why we think China is an interesting opportunity right now.

Goldman Sachs has recently stated they expect per annum growth to be around 7% for the next ten years. Lower than recent history, but still higher than Western Europe, North America and many emerging markets, which given the size of China, is extremely impressive.

The Price to Earnings ratio, a key guide to determining the 'value' of a market is sitting around 11.7, which is a medium setting, but well below the previous 10 year average of 25.3.

Indeed if one looks at the mini-market cycle of the 'A' share market (Chart 2, right), we can see that it is entirely probable that the cycle is in its early days, with only a 30% upside from the trough, and if the market can replicate somehow similar gains as in previous 'upswings' then this is an excellent entry point.

Two final factors contribute to a likely upswing in the market.

First is that the Peoples Bank of China (PBOC) has recently reversed the previous policy of keeping money relatively expensive, by hiking interest rates.

This has the effect of 'cooling' the economy by making it more expensive to borrow (for businesses and consumers alike) and encouraging savers to park their money in the banks.   However over the summer the PBOC twice lowered this interest rate and analysts predict at least one further cut before the year end.

That is an economic factor but the final factor is political.

By the end of the year, a new 'youthful' administration shall be installed by the Communist Party to take the country forward. Going on previous 'machinations' of the Partys' propaganda unit, they are likely to try to 'manage' the economy by ensuring that the market is in its best suit when the new guys take over.

All in all, we think this adds up to a compelling case for an entry point to Chinese 'A' shares, contact us for information on how to invest.

Author: linkedin small

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