04 June, 2015
Chinese stocks have soared over the last year, with the Shanghai Composite index rising 135% and the Shenzen Index up 171%, adding a staggering $US6 trillion dollars to the value of the combined indices. To put this in context, the total value of the NZ stock exchange is around $US50 bln, meaning that the "paper wealth" created in the Chinese stock markets is more than 100 times the total value of the NZ market.
What makes this rally even more astonishing is that it is occurring under the backdrop of a weakening Chinese economy, which raises major questions about its sustainability. The Government's role cannot be understated, having done everything within its power to facilitate and even cajole locals into buying shares.
While the government improved foreign access to the local share market it is the domestic initiatives that have had the most telling impact. The Government has allowed individuals to have up to 20 separate share accounts (previously just one), eased monetary conditions to allow locals to debt-fund their share purchases and run advertising campaigns encouraging locals to make share market investments. The Chinese people are typically very conservative with their savings but the combination of easy access and Government promotion of share market investments is having an astonishing and somewhat concerning impact on local investment behaviour.
There is now a speculative aspect to this rally which is all the more worrying when you consider that the majority of the millions of new accounts that have been established are for individuals who haven't completed secondary school and have no previous experience in the share market. An often quoted Wall Street saying from the Great Depression warns that it is time to sell "when the shoeshine boy offers stock tips". It appears that the great majority of the $US6 trillion in share market appreciation, which has taken valuations of many shares to nose-bleed levels, comes from these types of tips.
Rest assured, Fisher Fund's disciplined investment approach, targeting high quality growth companies with a proven track record and strong fundamentals, means we can avoid the sort of speculative rally that we are now seeing in Chinese shares. Rather than invest in the local Chinese share market, we gain our exposure to Chinese companies through the bigger, more established international share markets that provide us with greater transparency and regulatory oversight.