Capitalist Roader Fund
We at the Capitalist Roader Fund suffer from a fatal flaw: Our investment strategy is a rational one. When we see the index rise 38% over four months while the economy weakens, we question the foundations of the rally rather than throwing caution to the wind and trying to make money.
The economic news is still bad, although some people suggest it might be getting better. Questions of whether the stimulus plan would kick in have been replaced by questions of whether it will work for long enough to bridge the gap until domestic and foreign demand pick up.
We expect to see better numbers as the year goes on due to the stimulus effect and because fourth quarter year-on-year numbers will benefit from last year’s low base. That will likely prompt another rally as investors look at the headline figures rather than the reasons behind them.
In the shorter term, we expect to see some retrenchment and profit taking as investors tire of stimulus-linked possibilities. We might try to move back in if we see the index falling, to take advantage of the second-half rush.
Red Dragon Fund
Unsurprisingly, the earnings season numbers weren’t as impressive as in years past.
PetroChina (601857) reported a 2008 profit of US$1.67 billion, down 22% year-on-year. China Unicom (600050) saw profit grow by 58% to US$4.96 billion. Impressive, but most of it came from the sale of Unicom’s CDMA business to China Telecom. Look at the company’s continuing operations only and 2008 earnings come in at US$791.9 million.
Both sets of results were acceptable. We are particularly excited about China Unicom, which should fare well in the 3G era given that it will use the more mature WCDMA 3G technology. However, we can’t rule out some short-term pressure as the firm’s GSM network is losing momentum.
As expected, the Shanghai Composite Index climbed back above 2,550 points in mid-April. We are not about to get unduly optimistic. This is a small rebound in a bear market, which is ultimately of little help. But how long will the bear last? Indepedent economist Andy Xie says three years. Ouch! We’ll keep hunkering down.
Note: The Red Dragon Fund launched in August 2005 and is run by an industry professional. The Capitalist Roader Fund launched in June 2008 and is run by China Economic Review’s editorial team. Both funds are run solely as an editorial exercise. Follow them online at chinaeconomicreview.com/editors