No bubble here?
China’s A share market, which has had some spectacular results until recently, and includes large US investment banks among its successful fund managers, has been said to be in a “bubble.” (We have discussed elements of this previously.) Indeed, according to this piece in the FT, 70% of its investors apparently believe they have invested in a bubble, but according to the author, Jake Lynch of Macquarie, they are wrong:
A recent survey of Chinese A-share investors found that 70 per cent believed they were investing in a bubble, matching the perception of most foreign observers. The A-share market has been cited, according to a standard calculation, as trading at a price/earning ratios of 70 times. Even worse, 30 per cent of earnings are alleged to come from investment income (that is, stock trading) – in effect, a giant Ponzi scheme.
Combine the above with a reputation for questionable accounting practices and the threat of $1,300bn of previously non-tradable shares becoming unlocked in the next two years, and it is no wonder that the A-share market is now off about 36 per cent away from its highs.
So is this correction just the first leg of the great unwinding? Not likely. In fact, it is hard to find evidence of a bubble at all. Take valuations: the benchmark CSI 300 index is now trading at 23 times 2008 consensus earnings forecasts. This is not cheap, but it is far from what we think of as bubble valuations and below its 10 year average of 30 times…
consensus forecasts predict 32 per cent earnings growth this year. While 32 per cent seems like an aggressive number given the global slowdown, 7 percentage points come from a one-off tax break and a 25 per cent pre-tax growth rate may be achievable with a mid-teens nominal GDP growth rate – particularly when banks, oil and commodities are the main drivers…
a quick glance at the A shares that have been unlocked since 2006 show that only 10 per cent were actually sold into the market In fact, over 75 per cent of the shares being unlocked belong to the government. That they would be sold down en masse is highly unlikely. A much more likely scenario is the one that the government itself gives – that it will control the issuance of supply to continue to foster a healthily developing market.
Indeed, the increase of share supply is critical for a sustainable market. A-shares have historically traded at high valuations because China’s ratio of free-float market capitalisation to both GDP and savings remains far below other emerging and developed countries. In other words, there is not enough ‘supply’ of shares relative to high ‘demand’ from savers…
Time will tell if China’s “banks, oil and commodities” are the place to be in 2008, and whether the old argument of “not enough supply” of common stock to meet investors’ demands has any merit this time around. We have our opinion, but as we’ve said, we’re probably wrong.