A lan Greenspan started it. Or at least it’s fun to look at it this way. Certainly, the former chairman of the US Federal Reserve – whose every word was once taken down for posterity by newswires because of his market-moving influence – warned towards the end of May that Chinese stocks were headed for a “dramatic correction.”
He was, to a degree, correct. Only the sharp slump in the Shanghai Composite Index (SCI) that followed in early June had more to do with China increasing the stamp duty on stock transactions from 0.1% to 0.3%.
The tax increase sent the SCI down 6.6% on the day it was announced and the slide continued into June.
The regulators tried to turn the tide through positve newspaper editorials but this wasn’t enough for investors so they went away and came back with something more concrete – four new mutual funds were approved as a sign of confidence in the market. This sent the SCI back into its upward spiral and is now not far off its 4,200-plus high.
This volatility and temporary correction – which we had long been expecting – created various opportunities for the Red Dragon Fund.
In the days running up to the tax hike, we sold off our holdings in Jiangxi Copper 600362 and Beijing Capital 600008, taking a small profit on the latter, intending to re-enter once the market slipped.
We got back in on June 4 with the purchase of two blue chips, real estate developer Shenzhen Vanke 000002 and Yantian Port 000088. Our goal was simple: Realize short-term gain; and we did just that. Shenzhen Vanke was sold on June 7, having gained just over 12% in three days. Yantian Port followed a day later at a 10% premium on its purchase price.
With reassurances of long-term equities market strength being issued by just about every relevant regulatory body, on June 7 we also got back to work with our longer term stock plays.
Shanghai Petrochemical 600688, which we bought in mid-April as a quick-gain stock, is back in our portfolio, where it is joined by Harbin Pharmaceutical 600664. Both companies have yet to put their non-tradable stocks on the market so we expect a build up in investor interest as this moment approaches.
Good for the future
We remain optimistic about the market prospects in the long-term. Those in the know tell us that the SCI will finish the year somewhere in the 4500-4800 bracket. However, we don’t expect this rise to be without turbulence as equity markets will be hit by government tightening policies intended to cool down the economy.
A 3.4% year-on-year rise in the consumer price index in May had economists reaching for their calculators as they revised their full-year estimates upwards. Industrial output, up 18.1% after a 17.4% gain in April, and fixed-asset investment growth, rising 26.9% year-on-year, were also higher than expected in May.
It is generally accepted that the central bank will raise interest rates once again in July.
To gauge market interest, it’s useful to check the number of new trading accounts opened each day. Having dropped below 160,000 as the market corrected in, the number has returned to its previous level of 200,000. The bull does indeed appear to be here for the long term.