Investment Chart Kondratiev Wave

Investment Chart Kondratiev Wave

Saturday, 5 May 2012

Chinese equities were a disappointment compared to the high GDP growth. Will they do better now!

In the Financial Times ( China stocks battle the growth paradox) , was again an article that demonstrated good economic growth is not always a good equity market. The most grateful example for this is the Chinese market where since 2001 the equity market rose only 46% while the value of the output as up almost five times.

In general I agree with the thesis that the relation between the growth of the GDP and the stockmarket often is not that good or not there at all, but one should not too automatically take that as a certainty based on numerous scientific studies. Who could forecast well the economic growth in the next two quarters in the US could have earned lots of money with that in the previous few decades (more precisely: one should have avoided big losses: when you see a recession arriving you have to get rid of your equities).

The Chinese equity market is a difficult one with it’s a and B shares where you as foreigner are a B investor. Insiders that know what the government will do have a big advantage.

Wit IPO’s the prices are often way exaggerated obeying to the wishes of government that places again and again more shares of state companies. That continued dumping is also very bad for prices. So Joe Sixpack is very disappointed about equities and prefers to make money with art, porcelain, stamps etc. .

Government has dumped bad state companies at the markets. Especially banks had to finance these loss making state companies with lots of loans and so the banks were saddled with mountains of bad debt.

Because of the high GDP growth a lot has improved for the banks. The state companies are more efficient now and there are now more normal private companies at the market. So the quality of the Chinese equity market is a lot better than before say 2000.

 Until 2006 the Chinese equity market was doing horribly because of all those garbage, but in 2006 one started to realise that the quality of the companies had improved tremendously. Suddenly everybody started to buy and the Chinese started to gamble with stocks, believing the fairy tale that earnings would grow with at least the high nominal GDP growth. Then the credit crisis arrived and gone where the profits.

At the end of  2008 the Chinese government started to make investing in equities more attractive again with lower transaction taxes etc., not only with high infrastructure investments. As investor one can better believe the government (even more tha in the US don’t fight the FED) and so you had to buy.

The chart in the FT ( suggests that the Chinese government thinks share prices are too low and that they want action, less insider trading etc. and the Peoples Bank of China will of course follow suit. Especially when you believe China has a soft landing you should maybe obey again to the Chinese government and buy Chinese equities!

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