In last 3 months, Chinese market( Shanghai Composite) went through 27% correction. But, detailed analysis show that victims were mostly real estate developers and related stocks. Broader market weathered this correction quite swiftly correcting anywhere between 5-7% against 27%. And, now Shanghai Composite looks ready for major upside.
I wrote first part of China Ready to Surge 50% on Feb 11, 2010.(Click: https://investmentacademy.wordpress.com/2010/02/11/china-ready-to-surge-50/ ) When I recommended Chinese market, Shanghai Composite was trading below 3000 and went up to 3166 before correcting whopping 27% in less than 3 month from the top.
It is indeed major correction. But, I did not recommend exiting Chinese market during last 3 months.
Because, my investors did not lose single penny in this severe correction.
Yes, you read it right.
Let me tell you, why?
I had recommended JP Morgan JF Greater China Equity Fund to my investors. This fund primarily invests in China, Taiwan and Hongkong. Fund had almost nil investment in real estate developers and related stocks.
Investors, hedge funds and many experts were concerned about Chinese real estate bubble and recommended sell on China market.
But, if you analyse the fall, mostly real estate and related stocks went through correction. Rest market remained mostly intact with just 3-4 % correction compared to broader market correction of 27% from top to bottom.
Look at the real performance of Chinese stocks.
|JP Morgan Funds – JF Greater China Equity Fund|
|Sr||Date||Sub Type||Amount||NAV||No Of||NAV||Current||Current||Total||CAGR||Abs.|
|Weighted Avg. CAGR : 1.91% | Weighted Avg. Abs. Return : 0.72% | Notional Gain / (Loss) : Rs. 29,427.35|
Except once, fund was hardly negative to -6% when Shanghai hit the bottom but was quick to rebound on every small pull ups.
This inherent strength reinforced my analysis and I recommended to hold on investments.
But, I do not want to stop here. I would like to add more Chinese funds as it looks more promising story post correction than before.
Let us walk through some fundamental view points.
Recent Economic stats from China
· China’s GDP expanded 11.1% in the first half of this year
· China’s June exports jumped 43.9% year on year, the second biggest in 6 years
· China imported highest crude oil surpassing US in oil consumption, 22.27 metric tonnes in June, that translates to daily import volume of 5.44 million barrels!!!
· China’s industrial profits soared 81.6% through May. The combined sales of 39 industrial sectors soared to RMB 25.4 trillion ($3.7 trillion USD) in the first five months, a 38% increase over the same period last year.
· Nonferrous-metal mining profits soared 330%, while the coal mining industry saw profits rise 81%
· China’s urban fixed asset investment soared 25.5% in the January through June period.
· Central government and local government projects climbed 14.1% and 27.0% from a year earlier … industrial investments increased as much as 28.8% year on year and investment in the railway transportation sector rose 20.4%.
· China’s retail sales soared 18.3% in June, and are up 18.2% for the January through June period, year on year.
Let us also walk through China’s Real Estate Policy to address investor’s concerns.
Real Estate Policy
Almost all analysts are comparing China’s real estate bubble with US. They conveniently forget the true picture and facts and do not highlight them.
A. US authorities knew about real estate bubble since 2005, when Mortgage Bankers Association’s purchase loan application index topped out at 529.30 in June 2005. It has been incessantly falling since then and closed at 168.90 last week. US AUTHORITIES, REGULATORS DID NOT TAKE ANY ACTION TO COOL THE MARKET.
B. When experts, analysts started warning china on Real Estate balloon, Chinese authorities and Regulators wasted no time and took harsh actions to contain the concerns like
Ø First home down payment increased to 30% from 20% for 1st home buyer
Ø Second home down payment has been hiked to 50% from 40%
Ø Mortgage rates on second-home purchases will be at least 110% of the central bank’s benchmark lending rate,
Ø Mortgages for additional home purchases will face higher interest rates and higher deposit requirements
Ø Municipalities, particularly those that have seen sharp rises in housing property prices, have been ordered to submit new urban plans that ensure 70% of residential land is allocated for affordable housing
Ø Provincial governments will be required to take responsibility for helping to manage property prices, with authorities to be held accountable in stabilizing prices
Ø China’s mortgage-to-gross-domestic-product ratio rated a benign 15%, compared to levels of 80% to 110% typical in markets such as the U.S. bubble and U.K. prior to the financial crisis.
C In US, Real Estate bubble was wide spread almost covering entire nation. In
China, most analysts agree that it is limited to 70 big cities of China.
D I believe, there were more analysts, experts, central bankers and institutions
and economists incessantly warning US authorities, regulators and policy
makers about bubble situation and its devastating consequences if proper
actions not initiated immediately.
But, neither authorities and regulators acknowledged concerns nor they took action.
E On other side, you have China wherein Central Bank supports concerns,
Chinese premier too acknowledging bubble situation.
And, not limited to admission, but, followed by very effective actions.
This leads me to believe that probably Chinese leaders are more sensitive to
concerns and more proactive to take remedial actions at faster pace than
developed world. They are destined to keep economy afloat and buzzing.
After broad correction, Market has started picking up.
Do not forget, Shanghai is still whopping 57% down from the peak of 2008.
From Trading perspective, With closing basis stop loss of 2490, one can long Shanghai Composite.
For more fundamental view points, my China Ready to Surge part I (Click on Link: https://investmentacademy.wordpress.com/2010/02/11/china-ready-to-surge-50/ ), wherein, I have detailed fundamental viewpoints in depth.