Will we soon see darkness at the end of this halcyon-lit tunnel strewn with torn up record books that the rampant Shanghai Stock Exchange seems to leave in its wake? Down at the Red Dragon Fund, we are becoming uneasy.
As we closed our files for the month, the Shanghai Composite Index was bobbing around the 2,800 mark. Can it top the January high of 2,847? Ultimately, yes. Huge sums of fresh money are being put in the market and, as China’s markets open up further to foreign investors, the pool of capital will only rise.
But yet there is all this talk about excess liquidity. It’s rife in markets across the globe with China the most extreme example. This could make short-term positions somewhat precarious.
Just look at equity fund performances in 2006. China-focused funds led the way, with an average 92.94% return, according to fund intelligence agency Lipper, and these massive returns are inevitably drawing in more buyers.
We at the Red Dragon Fund value the brief periods of time we spend rubbing shoulders with those in the know – who can be relied upon to share their wisdom in exchange for a Suntory or two – because most of our time is spent with people who know nothing at all.
It is people in the latter category who are now spending big on equity funds.
Fund tips have replaced fashion tips as the hot topic amongst the female contingent in the office where the Red Dragon Fund retains a presence.
Executives down at Christian Dior must be tearing their hair out at the thought of all the handbags and haute couture accessories that remain on the shelves as these women plunge headfirst into equities.
However, these same executives would probably glue back their barnets with glee if they heard the spending plans these women have for their winnings.
After all, they say, if the girl on the third floor can get a 50% return in just two months, why can’t the rest of us?
What remains is not just an office awash with ambitious shopping lists and a market awash with lots of cash – this market also has a penchant for volatility.
The signs are already there. A number of flagship blue chips have been zigzagging across the charts recently, as price hikes are followed by sharp drops. For example, a slip in bank stocks saw the Shanghai index lose over 100 points in its final 10 minutes of activity on January 4.
Morgan Stanley caught the mood of uncertainty quite well in a recent report: "It’s difficult to measure the definite time when the greed of human and market will peak. But the valuation level of A-shares is beyond that of the shares in the American market."
The government has also crashed the party, announcing a 0.5% increase in banks’ reserve ratio requirement, effective from January 15, which is seen as a move to take liquidity from the system by tying it up in the banks. Further reserve ratio increases are expected to follow.
Bye-bye blue chips
With our blue chips apparently stumbling into a period of unpredictability, we think it is time for a spot of profit-taking. Baosteel 600019 and Yili 600887 once again both had solid months, posting gains of 22.5% and 25.7% respectively.
We’ll bear them in mind for the future but right now it’s time to cash out.
As a second-tier blue chip, Daqin Railway 601006 is less likely to find itself squeezed should investors start belt-tightening. It is also worth taking into account the strong prospects for the logistics sector in the year ahead, with a number of logistics and infrastructure-related listings in the pipeline.
So we’ll hold on to Daqin Railway and also keep an eye on the progress made by other players in the sector, particularly Guangshen Railway 601333 and CM Energy Shipping 601872.