Capitalist Roader Fund:
The Shanghai Composite Index (SCI) is now comfortably above 3,000 points – it closed at 3,086.94 yesterday and has broken through 3,100 this morning. In part, that’s a reflection of investor confidence within China of the strength of the domestic economy, but it’s also driven by the Federal Reserve’s announcement that it would buy up significant chunks of Treasury debt to stimulate the US economy.
This policy of qualitative easing, known as QE2, will weaken the US dollar, making the prospect of an appreciating renminbi ever more appealing to currency speculators. At the same time, higher interest rates and stronger economic growth in China than the developed world make the country an attractive target. Some of the resultant currency inflows will find their way to the equity market, and will push up valuations. Expectations of that push appear to be at least in part behind the current rally. However, as the US stimulus is also likely to increase inflationary pressure in China, it may have an ultimately negative effect on the domestic market – if Beijing attempts to raise interest rates again to combat inflation, it could attract even more speculative capital.
The fund was mixed this week – China COSCO Holdings (601919.SH) is up around 7% on the week, but Huaneng (600011.SH) is down very slightly – about 0.1%. Joyoung (002242.SZ) rose on Monday and Tuesday, but had given up its gains by the end of Thursday.
At the market’s close on Thursday, the Capitalist Roader Fund was down 36.77% from June 3, 2008. The SCI was down 10.16% from June 3, 2008.
Red Dragon Fund:
The market seems to be picking back up after some profit-taking earlier this week. That’s certainly true for the auto sector, and we expect our new holding – FAW (00800.SZ) to recover the RMB21.00 level when the benchmark Shanghai Composite Index breaches 3,100 points.
The US Federal Reserve’s quantitative easing policy is sure to give institutional investors more confidence to launch an attack. We’re now focusing on natural resources stocks, which are likely to be the key beneficiaries of the new US policy monetary policy. We’re looking particularly at rare earth metals and coal.
The Red Dragon Fund launched in August 2005 and is run by an industry professional. The Capitalist Roader Fund launched in June 2008 and is run by China Economic Review’s editorial team. Both funds are run solely as an editorial exercise.