The herd is a powerful thing. When A-shares were rising in 2007, the conventional wisdom was that they were unstoppable. When they were falling in 2008, there seemed to be no end in sight. In 2009, the herd has decided that government stimulus will be the market’s savior, and the Shanghai Composite Index has risen nearly 38% since the beginning of the year.
That rise comes amid such cheeriness as China’s lowest rate of economic growth in nearly 20 years, conflicting data about manufacturing (CLSA’s PMI showed sharper contraction, the China Federation of Logistics and Purchasing’s PMI indicated expansion) and ever-clearer signs that China may have to go it alone, post-stimulus, as foreign demand remains moribund.
Our bearishness this year has been nothing if not consistent. It has now been two months since we sold Anhui Conch Cement (600585.SH), which had long been the bane of our fund’s existence. We sold after Conch posted some early gains this year. It has, of course, gone on to rise another 14%. In the minds of those buying, stimulus equals infrastructure equals cement equals profit.
That may be true. Still, it’s hard to shake the feeling that the performance of the wider market is based on emotion, not numbers. A slight rise, maybe – but 38%?
It could be argued, we suppose, that the rise is a reflection of the market over-shooting on the way down, that what we’re seeing now is a return to proper valuations – but that’s not the mood we’re feeling from the herd. We’ll see how long it continues to feel that way.
The Shanghai Composite Index is down 27% since we bought in, while the Capitalist Roader Fund is down 33%. It appears the market has the last laugh this week.