In August 2005, CHINA ECONOMIC REVIEW decided to invest RMB10,000 in A-shares. And so the Red Dragon Fund was born…
It has been a case of rebound, correction and consolidation for the A-share market this past month – pretty much like the month before that.
In June, investors were hit with a stamp duty increase, lost their nerve and regulatory intervention was required to bring things back to an even keel. The market rebounded from 3,600-point territory to 4,000-plus but, almost exactly a month later, it was at it again. On June 4, the Shanghai Composite Index (SCI) compounded consecutive days of small losses by closing 5.3% down at 3,615.87.
The contributing factors? Certainly, the easing of restrictions on Qualified Domestic Institutional Investors had an impact but there was also talk of action to cool the markets such as a capital gains tax on share sales. Yes. Again.
All this does very little to reassure us that China’s stock markets are not beholden to the whims of government policy rather than any financial common sense. For several months now, the SCI has been locked in a rebound-correction-consolidation cycle – every month there is a dramatic subplot fueled largely by hearsay.
During the correction, fund managers were busy accumulating blue chips. The media calls it as “gathering for warmth” – preventing the lowering of their net valuation by buying index-weighted stocks, most of which are blue chips.
For its part, on June 28, the Red Dragon Fund took Jinqiao Export 600639 into its portfolio. This brings the total holdings to three stocks: Shanghai Petrochemical 600688, Harbin Pharmaceutical Group 600664.
Jinqiao Export has various commercial real estate interests as well as stakes in several domestic brokers such as Guotai Jun’an, Haitong Securities and Oriental Securities, all of which are doing well on the back of the gains made by the market in the last year or so.
With a limited number of pure play brokers, the best point of access for investors is often through companies that have ownerships stakes in unlisted brokerages. As more financial products are introduced to the market and brokers learn to manage their risk, we expect a shift away from the profit-loss cycles of old towards more consistent income streams.
For this reason, we are prepared to hold Jinqiao Export for some time.
When it comes to other investments, like many following the markets, we are left uncertain by the regulator’s propensity for creating bubbles while trying to eliminate them. On June 26, A-shares in China COSCO Holding 601919 began trading at RMB8.48, which means a price/earnings ratio of 98.67. It rose 93% on its first day, closing at RMB16.38.
In contrast, when COSCO Holding debuted in Hong Kong, it sank below the IPO price and stayed there for 16 months, earning the nickname “submarine.”
On the one hand, the government is clearly not educating the investors about the dangers of a stock market bubble and, on the other, its IPO pricing strategy is clearly playing an active role in creating bubbles in the first place.
Taking a broader view of events, China’s runaway growth in the first half, coupled with another record inflation figure for June, unsurprisingly led to another interest rate hike. This is unlikely to be the last of the tightening measures and so we have to conclude that a period of consolidation lies ahead for the stock market.