Guest post by Sober Look.
China’s retail investors have lost all confidence in the nation’s stock market. In spite of improving economic fundamentals (see discussion), the market continues to plunge. Unlike many other emerging markets, China’s domestic stock market trading is dominated by retail investors. And many feel they have been duped, as the market hits new lows.
JPMorgan: – Of the households with stock market investments, 77% had not made a profit. The stock market has been the worst performing asset class over the last 5 years from various investment instruments available to the retail investor. If a retail investor put Rmb100 into the CSI300 5 years ago and left it, it would only be worth roughly Rmb 47 today…
|Shanghai Stock Exchange Composite Index (source: Yahoo Finance)|
China’s brokers have spent the last few years hyping the market, with a positive projections each new year. And each year retail investors have been disappointed. Now some are waiting for the government to effectively “bail out” the equity market before they would feel comfortable getting in.
WSJ: – “Local retail investors have lost faith on the stock market over the past three years. How can we expect investors to rush into a market where all expectations for a bottom, say the 3000 and the 2000 level, have proven to be wrong?” said Amy Lin, analyst at Capital Securities.
“The market is likely to stay weak until the government launches significant market-friendly measures, such as more stock buybacks of listed companies and another cut in banks’ reserve requirement ratio,” she said.
Many of China’s retail investors simply left the stock market altogether, preferring property and gold instead.
FT: – The domestic Chinese investors who dominate trading in Shanghai have had plenty of bad news to weigh up over the past couple of years. China’s economy has slowed for seven straight quarters and is on track to record its lowest annual rate of growth for a decade this year. There are concerns, too, that the political paralysis surrounding the country’s once-a-decade leadership transition has delayed needed reforms.
Indeed, many Chinese investors have simply given up on equities and moved to other investments such as property, gold or high-yield wealth management products.
The percentage of dormant brokerage accounts has been rising.
In a market with a more diversified investor pool, one would see this retail capitulation as a bullish sign. But there are very few active institutional players in China’s domestic market (although the government has been trying to change that by increasing foreign investment quotas.) For now it will take either retail investors coming back or a government action to turn it around. And given the change of the guard in China’s leadership, it may take them some time to organize a decisive action. For institutions who do have access to China’s domestic market however, this may be a good time to start testing the waters.
Of late market watchers in the U.S. are wondering if the QE3 stimulus will have a comparable effect on markets as the first two rounds of easing. And of course we in the US are nearing the end of the third quarter with earnings season just over the horizon. Around the world the ongoing euro zone financial crisis remains in the center circle of the world’s financial circus. But what caught my eye this afternoon in doing my weekly world market updatewas the ghastly performance of Shanghai Composite.
My friend and occasional guest contributor Chris Kimble came up with the notion of an Eiffel Tower formation as an emblematic way to discuss asset bubbles, which was featured in a guest commentaryfrom last summer. The behavior of the Shanghai index over a two-year period beginning in late 2006 is a classic example, as the first two charts illustrate.
Guest post by Doug Short.
Markets around the world rallied last week, or to put it more precisely, rallied in overdrive mode on Friday. France’s CAC 40, the top performer with a weekly gain of 3.42%, had a four-day loss of 1.27% at Thursday’s close. But the outcome of the eurozone summit sent buyers into a frenzy (with some significant short covering, I would imagine), and the index rose an eye-popping 4.75%. The German index exhibited the same behavior — down 1.81% for the week at the outset of Friday’s 4.33% advance.
China’s Shanghai Composite was the odd man out. It lost 1.57% for the week despite its 1.35% gain on Friday. The index is down 35.89% from its interim high in 2009. The signs of slowing economic growth have taken a toll on the Shanghai, and the Chinese Manufacturing PMI, due out later today, will probably influence the Monday’s markets in the People’s Republic.
The table inset in the chart below shows that four of the eight markets are in bear territory — the traditional designation for a 20% decline from an interim high, down from five last week with the German index rising above the bear stigma. In our gang of eight, the S&P 500 remains the closest to an interim new high, down only 4.01% from its April 2nd peak.
While we await the European opening session and further news flow out of the Eurozone, India reports rather depressing industrial production figures. Rate cuts ahead. Bloomberg reports;
India’s industrial production shrank in October for the first time in more than two years, sending stocks and the rupee lower and bond yields to a two-month low.
Output at factories, utilities and mines fell 5.1 percent from a year earlier after a revised 2 percent gain in September, the Central Statistical Office said in a statement in New Delhi today. That’s the first decline since June 2009 and compares with the median estimate for a 0.7 percent drop in a Bloomberg News survey of 24 economists.
With investors focusing on more or less irrelevant news out of Europe, regarding whether Slovakia, Malta or some other irrelevant country will vote on the EFSF or not, one risks of losing sight of what’s going on in other markets. Despite our bearish stance, we warned of this squeeze a week ago. Cheap or expensive, markets move aggressively in short time frames. SPX is reaching some short term resistance, but look out for a squeeze in China.
We would like to point out China’s strong performance overnight, where index put on a 3% gain. Note how the big formation has reached the long trend line, and we can expect further gains. Compare the two charts below. Last time food price index took a dive (circle), the Shanghai index put on a close to 30% gain in a matter of weeks.