Capitalist Roader Fund:
It has been a good year so far for China’s stock markets. The Shanghai Composite Index (SCI) has risen 75% since January, and is now less than 300 points shy of its level of June 3, 2008, when we made our first investment.
This is partly because of greater optimism in China than in markets elsewhere in the world, and the belief that Beijing will ensure its 8% growth target is met. More cynical investors (ourselves included) might note that the rise has been helped along by new bank lending, 20% of which has apparently been channeled into stocks.
Still, it’s hard to resist a bull market, and we think that the second half will prove fruitful for infrastructure companies. As such, and since writing about a cash-only fund is boring, we bought 200 shares of Jiangsu Expressway (600377) on July 8.
In addition to a strong balance sheet, expectations for positive earnings growth and relatively sleepy performance this year compared with competitors, we’re betting that Jiangsu Expressway will benefit from market excitement over the A-share listing of road operator Sichuan Expressway.
Red Dragon Fund:
It seems the A-share market is replaying the events of 1997: a stock market carnival, with prices and trading volumes surging. Given the abundance of liquidity, we shouldn’t be surprised by this. The housing market is experiencing a similar case of déjà vu.
Taking safety as our priority, the Red Dragon Fund missed some money-making opportunities – we were waiting for a market adjustment before making any moves and this adjustment hasn’t happened.
Nevertheless, in expectation of price hikes for refined oil products, we bought 300 shares (the same volume as we already held) in Petrochina (601857) and sold them two days later. This served to bring down the cost of the same shares we hold.
The SCI topped 3,200 points on July 16, but sectors delivered mixed results. Financial and resource stocks maintained their rally while telecom and infrastructure struggled.
We believe the SCI will peak around 3,500, but the market is overheated and a sudden bout of panic selling can’t be ruled out. This could take the index down to 3,000. Banks, real estate and steelmakers are our principal areas of focus.
