Red Dragon Fund:
As we predicted before the Lunar New Year holiday, the A-shares began the year of the ox with a rally. This gave us the opportunity to further reduce our positions in PetroChina (601857) and China Unicom (600050), as we believe that the mid- to long-term outlook of the A-share market remains negative.
Around the middle of February we started seeing a significant jump in the market trading volume, which suggested that non-tradable shareholders were active again, taking advantage of the rebound. We can expect more of this in 2009. A total of 682.5 billion formerly non-tradable shares will be released into the market this year – quadruple the amount released in 2008, and close to the number of shares currently in the market.
The Red Dragon Fund is likely to take a more speculative approach to investment, leveraging the temporary rebound. Our focus will be on sectors that stand to gain from the stimulus package – i.e. anything infrastructure-related – as well as sectors that don’t have huge tranches of soon-to-be-tradable shares hanging over them.
Capitalist Roader Fund:
Our investment strategy has for the most part failed to live up to our fund’s red-blooded name. After a couple of purchases last year – and the single dumping of an ill-starred bet on Hubei Guangji Pharmaceutical (000952.SZ) – we’ve clung to our holdings, whimpering as the market floundered.
On February 13, we took the decisive step of severing our long, tempestuous relationship with Anhui Conch Cement (600585), which was our first buy in June last year. Its stock price quickly fell through the floor and never recovered in 2008.
Thanks to the stimulus package buzz, things have been slightly different in 2009, and Anhui Conch is up 27% so far this year.
We’ve said before that we don’t think state stimulus will make up for weakness in private investment. The market rally is, in our eyes, misguided. Economic fundamentals haven’t changed. If anything, things are getting worse.
While we would not be surprised to see the market post gains over the next few weeks, we just don’t think it will last. We’re getting out while we can.