In the first three quarters, profits from investments accounted for 32 per cent of total profits made by listed companies in China and stock gains became one major source of profits.
What this means is that China-listed companies are more like a good money manager rather than a good producer. While a bull market will make everybody happy, a downturn will make investors lose twice - from profit erosion and stock price drops, spurred by weak earnings.
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Business Times - 18 Dec 2007
China stock markets may correct in 2008
That would pose a real challenge for fund managers there
By TIGER TONG
ON DEC 14, the Shanghai Composite Index, which covers both A-shares and B-shares listed on the Shanghai Stock Exchange, closed at 5,008 points. On top of the 130 per cent gain last year, the index has jumped 85 per cent year-to-date. The Dec 14 closing is, however, 18 per cent lower than its peak at 6,124 on Oct 16.
As 2008 approaches, investors are wondering if the market is still in the process of a correction or if 2008 will be another fruitful year.
On the surface, China's bull run from last year reflects the country's strong economic momentum. In the first three quarters of 2007, China's economy grew 11.5 per cent, exceeding most projections made at the beginning of the year. At the same time, China-listed companies witnessed an average of 68 per cent gain in net profits. But during the same period, the Shanghai Composite Index was more than doubled. If that seems to be a sign of a little over-optimism, a closer look reveals something really wrong.
In the first three quarters, profits from investments accounted for 32 per cent of total profits made by listed companies in China and stock gains became one major source of profits.
What this means is that China-listed companies are more like a good money manager rather than a good producer. While a bull market will make everybody happy, a downturn will make investors lose twice - from profit erosion and stock price drops, spurred by weak earnings.
Taking investment profit away, the average earnings growth of companies was only about 20 per cent, which makes the 100 per cent index surge over the same period look more dangerous.
While many investors think that the index at 5,000 will see strong support, the current price is still not cheap. I estimate that the current average price-to-earnings ratio (estimated earnings in 2007) is about 35-40. Taking investment profits away, it will be about 50.
So how about next year? To be sure, I am very optimistic about China's economy in 2008 and don't think China will repeat the fate of Japan 17 years ago.
While the direct economic boost of the Beijing Olympics is often exaggerated, it does provide an unprecedented opportunity for China to launch a great marketing campaign. Even though China has had an open door for 28 years, many foreigners still think China is a communist country. The Olympics will enable them to discover the potential of China. Indeed, while the big wealth gap among regions may cause some social problems, it provides room for China to switch about the production chain within the country. Producers will continue to find cheaper place to lower their cost. With China emerging as a big market, where else can you find such a perfect combination in one country: low production cost, big market, rich talent and world-class infrastructure?
But the saying goes: a good company might not be a good stock. Similarly, economic fundamentals have become irrelevant to China's stock markets. The new corporate income tax system will make companies report a better result. The new tax code will cut the nominal income tax rate from 33 per cent to 25 per cent.
But it can hardly offset the potential slowing down of investment gains. Indeed, the market has priced in this favourable new policy in 2007.
Perhaps the only possible support for a higher-than-normal PE will still be excessive liquidity; investment funds will be a major channel for fresh capital to flow in.
The fund management industry, within 10 years, has emerged as the most influential institutional investor in China. In 1998, the assets under management (AUM) were a mere 10 billion yuan (S$1.97 billion). The value as of Sept 30, 2007 reached 3,023 billion yuan, or more than 300 times that 10 years ago. As of Sept 30, AUM accounted for 35.3 per cent of total market cap of shares listed on Shanghai and Shenzhen. Many new retail investors, who are the main force of new capital injection, believe fund managers will do a good job. Though they are among the best in the securities industry (fund managers are relatively in short supply, due to fast expansion of this industry), in China, they hardly fully utilise their skills.
Everyone wants to make a fortune overnight; the interest of China's retail investors will pretty much focus on short-term gains, namely one week, and at most, one quarter.
Since most investment funds in China are open-ended, fund managers are forced to cater to their investors for short-term gains. It is mainly to avoid large-scale redemption. A longer-term strategy might cause a dip or even just slow growth in net asset value (NAV). Though touted as value investors, many fund managers become more like momentum investors. Instead of trading good stocks, they frequently buy and sell the same stocks. Therefore, rather than stabilising the equity market, investment funds increase the market volatility.
China's regulators want to manage the market movement by controlling the approval of new funds. For example, they felt the index was surging too fast in 2006. In late January 2007, the China Securities Regulatory Commission (CSRC) suspended new funds offerings to curb excess liquidity. But when the Shanghai Composite Index lost 8.4 per cent on Feb 27, a 10-year record, CSRC then rushed to resume new fund offering to boost investors' confidence.
This awkward brake-and-accelerate method has been adopted quite a few times. The last suspension was late August. Now as the market is going down, regulators start to release the brakes again.
This method is expected to continue in 2008. But some new investors might remember the pain since the market correction started from mid-October, therefore this method might be less effective in the future.
The first challenge will arrive when 2007 annual results are released. If the fourth-quarter earnings growth shows significant slowdown, which is very likely since the market has a terrible Q3 in 2007 and a crazy Q4 last year, a big correction can be expected.
As social stability is the top priority, the Chinese government will step in to boost the market if something really goes wrong. Perhaps the best that the government can do is to help the market take a 'soft landing'.
It will be then, as many have said, when individual stocks will matter. It will be a good opportunity for China's fund mangers to show how capable they really are.
Tiger Tong is an analyst with China Knowledge, a premier provider of trade and investment information on China
沽中交建（1800），換馬中鐵（390）
曾淵滄：跌破26000進一步減持
2007-12-18
目前影響港股的因素有美國的次按問題、美國減息的趨勢、中國內地宏觀調控、中國的經濟發展路向，還有，港股直通車。次按問題，談了又談，但陰影始終揮之不去，減息是利好因素，但市場似乎對減息的速度與力度不大滿意。也許，我們還得再等多兩三個星期，到時候市場也許會再興起炒減息之風。中國內地宏觀調控打壓的不是全部企業，主要災區是房地產股。中國經濟發展路向是繼續搞基建，因此基建股的抗跌性應該最強。上星期五，2日移動平均線已經跌破19日移動平均線，那是沽貨、減持的訊號。接下來，是甚麼時候我們應該更進一步減持？牛市已經持續4年多，是時候一步步減持股票了，我的策略是根據移動平均線做第一步減持，然後觀察大市是不是一浪低於一浪？若是，再減持。甚麼是一浪低於一浪？這就是當這一次恒生指數的下跌底部比上一回的底部低，之後，反彈的頂點又比上一回的頂點低，這就是一浪低於一浪。上一個反彈浪，底部是26000點，頂部是30000點，昨日恒生指數跌至26658點，如果跌破26000點，可以先減持一部份，然後耐心地等反彈，如果反彈不上30000點，再減持另一部份。
沽中交建換馬中鐵
減持多少才算適量？前天，在我的新書發佈會上，有讀者這麼問。答案很簡單，那就是你晚上可以安心睡覺。股市已經升了這麼多年，大幅度調整是不可避免。你晚上是否能睡得好覺，很大的程度決定於你手上的股票是甚麼時候買進來。是2003年股市最低潮的時候，如果是，今日股價依然會遠遠高過你的買入價。如果你是今年才買入，則晚上可能睡不覺。所以，大約一個月前，幾乎賣光了2007年才入市買的股票，買賣股票，保持自己身心輕鬆是很重要的。昨日，我決定再減持中交建（1800），將套現的錢全部用來買中鐵（390）。中鐵上市時，我賣掉一半中交建，將錢用來申請及於上市後馬上追入買中鐵，昨日再進一步減持換股，理由是我比較這兩隻股，似乎中鐵是比較便宜。而且，更重要的是中鐵上市遲、集資額高；中交建上市早、集資額少，集資額越高，將來再配股集資的機會也較小，財力也更強。
Waiting to Pounce on Asia Once the U.S Bursts
December 18, 2007
Notes from Dr. Enzio von Pfeil’s recent appearance on CNBC Asia.
• I don’t see revised U.S. Q3 GDP changing much from the original 2.9% annual percentage change.
• But this is not the real issue. Looking backwards is infinitely less profitable than looking ahead for us investors.
• I suggest that in 2008, the U.S. will face stagflation: growth will stagnate on account of the Fed having to stop cutting rates. The Fed will have to stop cutting rates because of cost push inflation: an ever lower dollar drives up import costs, and falling productivity drives up unit labor costs. On top of which you will see the subprime crisis morph into less bank lending and that will drag down the business sector so more people get fired, particularly in the finance sector. All in all, watch The Economic Time™ worsen massively in America!
1. What are your thoughts on the recent rate cuts? Is it enough to help?
• Absolutely not.
• The key idea is that banks do not want to lend to each other, full stop. So even if rates keep getting cut by the Fed – well, that is a drop of water on a hot stone. It will be interesting to see if the recent Central Bank moves to auction off funds to the highest bidder will help. We don’t think so. The banks most in need of funds have been excluded from such auctions, as only those who are eligible for financing from the Fed’s discount window may join the auctions.
2. How well has Bernanke handled the sub prime crisis this year?
• Much better than Dr. Greenspan whose easy money policy helped create this mess.
• He has seen The Economic Clock™ in America ticking ever more loudly regarding the worsening state of affairs. And, contrary to other administration members such as Hank Paulson, he has had the intelligence and humility to listen to what non-Americans are suggesting. Thus, he took the advice of the European Central Bank and introduced one month funding auctions in America.
• But it is for the banks themselves to clean up their acts. The Fed cannot do that much, and hopefully will not bail out their greed!
3. The U.S.-Asia decoupling
• Certainly not in the short term: when America’s market cracks in 1Q08, Asia will tumble, too. Psychology is psychology, and transcends any cultural sea. People get scared when major markets crack.
• Aside from psychology, there are also the “real economy” effects to remember: if America goes into stagflation and a residential property market crisis, as Japan did in the 1990s in her commercial property sector, America’s imports from Asia must fall. That will hurt employment out here and those “pocketbook blues” will embed themselves in other sectors, too.
• Thus, things are not so "different" this time around.
4. Where will you put your money next year? What sectors are looking good?
• Currently, our Theme Fund is long commodities such as gold and oil.
• Our Economic Time Fund is long only a “short” on the U.S. market.
• Otherwise both funds are long of cash, particularly Australian dollars and Euros.
• Once the U.S. crash occurs, we will wait and then reload into Greater China, India and “glamour” stocks such as Baidu (BIDU).
5. Any other points you would like to include
• Much has been made of China’s “tightening” in order to control her “overheating”.
• We see things differently, perhaps as we are perched on her doorstep in Hong Kong:
a. Beijing does not rule China, so any idea that Beijing can control the Chinese economy is unreal.
b. Beijing must keep creating 10 million jobs a year, so the idea of slowing the economy down is unreal, too. The key issue that Beijing is seeking to address is rampant property speculation. But as we just noted, Beijing’s measures must find the support of local governments, and that track record is patchy…”The sky is high and the emperor is far away…”
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