A snow-covered mountain is not the ideal place from which to keep track of the stock markets, but this is where a team from Everbright Securities found themselves at the end of January. They had chosen the picturesque Huangshan in Anhui province as the location for their strategy meeting – only to be snowed-in by the stormy weather.
“For a while, we couldn’t get back to Shanghai so we just had to look out the window at the snow,” said Alex Guo, an analyst with the company.
He noted that they weren’t the only financial sector players to be thwarted by the elements, telling stories of fund managers grounded at small airports, unable to manage their portfolios while they waited for flights.
Climate of uncertainty
Yet these inconveniences are something of a sideshow compared to the turbulence that has gripped Chinese equities in recent weeks. While Guo is advising his institutional clients to seek solace in blue chip and consumption-related stocks, individual investors, unable to fall back on expert advice, face uncertain times.
The Shanghai Composite Index (SCI) rose 97% last year, but has begun 2008 down by as much as 17% – driven by a combination of fears about a US recession and the fact that share prices were already inflated.
On January 31, the market was coming to the end of a brutal fortnight of losses. The period began with a single-day fall of 7.2% to 4559.75 points and things haven’t improved since then. Investors gathering in the securities exchange office on South Tibet Road in Shanghai that Thursday afternoon watched the SCI slip below 4,400. It would fall again the following day before posting an 8.1% gain on February 4 to enter the holiday period with its tail up.
“People around me invest in stocks: When we chat and do morning exercises, we talk about stocks, so I joined in. I am definitely a follower, as I don’t know much about the market,” said a 55 year-old retired teacher, surnamed Zhu.
“Now I am trapped; many people are trapped.”
Like Zhu, several other investors in the exchange office entered the market on the advice of friends, reaping easy initial profits, but are now searching for a way out. They say they felt the need to invest largely because of negative real interest rates – where the rate of inflation is higher than bank deposit rates.
“There are only two good means of investment for us: real estate and stocks,” said Yu Jirong, a 31-year-old employed by the Shanghai branch of China’s state-owned assets regulator.
Yu and the others accept that in 2008 this will not be easy. However, they are content to hang in there and, as Zhu put it, “wait for the rebound.”
“Generally speaking, Chinese investors are reluctant to realize losses. As long as they still hold the stock they don’t feel they have lost anything,” said Fraser Howie, who co-authored a book on China’s stock markets.
But he agrees there is reason to be positive, noting that the country has yet to reach a tipping point at which retail investors are reluctant to get involved. However, he believes it is “months rather than years” before China gets there.
This cautious optimism is shared by Qiu Yanying, chief strategist at TX Consulting, one of the country’s largest investment consultancies. He expects the market to see a 30% gain in 2008 but warns that Beijing will persevere with economic tightening measures even if it causes stock market losses.
“People will have to be very careful when they invest,” Qiu said. “They can’t do it blindly like before.”
Some individual investors claim to have taken such advice on board. A number of those gathered in the exchange office said that, while they still tuned in to stock gossip, they supplemented it by reading up on how the markets work, with technical and sector analyses.
Strictly short term
However, most people were still focused on short-term gains rather than long-term financial planning. A 55-year-old surnamed Wang, an investor since 1992, said he had seen enough of the peaks and troughs that characterize China’s capital markets to no longer believe in long-term investment.
“Since the institutions are all speculators, why are individuals like myself always advised to focus on the long term? Today the index is down, but my stocks performed well,” he said.
Howie sees this as typical of the market. “No one is going into the Chinese stock market thinking about asset allocation or their pension fund – it’s because the market is going up 100%. As soon as that does not happen then money will start coming out.”