It has been really interesting. In step with the Shanghai Stock Exchange (SSE), stock markets around the world are going through massive sell off. Media is also overrun by discussions, including one this morning on National Public Radio of the US, whether this is just China or Janet Yellen and FED etc.
First, IMHO, the Chinese Marketis going through a massive correction that looks like a crash. But it is a huge deflation of a Huge speculative bubble. Below is the 2 year graph of Shanghai market
Prior to Aug 2014 (July 22nd to be precise) SSE was around 2000 when it started a slow rise. By Nov 20th the market had risen nearly 20% in 4 months, when it started to take off. By June 12, 2015 it had reached 5178! That is, 258% the levels less than 11 months before! Also note the huge rise in volume!
The reason? Should one care?! A quick Google search -- and that's all the time I have -- shows a lot of opinions and speculations on what started this speculation. They range from the massive borrowing and change in government rules, to the governments effort to deflate of the real estate bubble which started in 2011! But this did not improved the Chinese economy. Quite to contrary the Chinese economy, which is heavily dependent on the economy, was already slowing down.
But here is where it gets interesting. Regardless of the reason, this is a major correction, deflating a bubble that was caused by... XYZ! in China! To further show this below is the graph of the SSE index compared to other major Stock Indices around the world -- Dow Jones, Nikke, FSTE, DAX and even Hang Seng -- since early 2014.
Note that none of the other indices behaved anything like Shanghai's SSE starting in Mid 2014. In fact, Nikke has had a steady rise, but the other 4 indices have gone back to their earlier levels or even negative territory.
Therefore, one would think that in a rational market money would move out of China into other markets, or may be into Chinese bonds, or savings. Instead, all markets are dropping. China did restrict outsiders from investing in its market (may be they changed the rules). But I googled around to see if China restricts domestic investments in foreign stock markets, and instead found articles on China increasing investments in overseas markets.
Note that none of the other indices behaved anything like Shanghai's SSE starting in Mid 2014. In fact, Nikke has had a steady rise, but the other 4 indices have gone back to their earlier levels or even negative territory.
Therefore, one would think that in a rational market money would move out of China into other markets, or may be into Chinese bonds, or savings. Instead, all markets are dropping. China did restrict outsiders from investing in its market (may be they changed the rules). But I googled around to see if China restricts domestic investments in foreign stock markets, and instead found articles on China increasing investments in overseas markets.
Two other facts. IMF had said recently that the US stock market was over valued; and I do believe them. The Dow Jones Industrial has shrunk by 14% in 4 months from its 52 weeks high-- about 4% today (Aug 24). The broader Russel 2000 is down almost 20% in two months, and Nasdaq has dropped 20% in a month. Those are large numbers in short time frames and inline with a correction. But, the more interesting question is: how did IMF miss the Chinese bubble!?!
Second, the Chinese government has certainly been concerned, and if you believe the media, they have been concerned to the point of paranoia. Now they are allowing their pension funds to invest in SSE! IMHO this is quite scary! If this is a speculative bubble and the underlying value is not there, this policy can dampen the landing but it may very well fuel the speculation. I fail to see how it creates value. The average Price Earning Ratios (P/E) is admittedly a bad measure, but easier than others to calculate, or pick your own measure. It may end up higher than July 2014 for SSE, but I would think the underlying bubble still needs to deflate; in particular, if the underlying Chinese economic growth and exports are slowing down which seems to be the case.
Cheers, E
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Esfandiar Bandari, PhD, MBA
e.bandari@cantab.net, e.bandari@gmail.com
skype: ebbandari & gtalk: e.bandari
http://www.linkedin.com/in/ebandari
Esfandiar Bandari, PhD, MBA
e.bandari@cantab.net, e.bandari@gmail.com
skype: ebbandari & gtalk: e.bandari
http://www.linkedin.com/in/ebandari
PS Except for the first paragraph, this posting is almost an exact copy of an email reply I sent to a dear "quant" friend :-) One thing is obvious. While waiting for a reply, I may have too many good quant friends raising interesting questions! ;-)
