Stocks Down 50% — In China
Kurt Brouwer April 18th, 2008
Chinese stocks have taken quite a hit since October, 2007 as this post from the Wall Street Journal’s MarketBeat Blog points out [emphasis in the original]:
China Staggers Around The Track (MarketBeat Blog, April 18, 2008, David Gaffen)
Investors hoping to ride China’s stock market run into the summer Olympics in Beijing have found themselves gasping for oxygen. The most dismaying part is that despite a 50% decline in the country’s major stock index, it may still be overvalued.
The benchmark Shanghai Composite Index ended Friday’s trading down 4%, and has lost 50% from its mid-October record high of 6124.04. Despite this, analysts at Bespoke Investment Group estimate the forward price-to-earnings ratio of the index at 20.90, which ranks second among 13 major world indexes, trailing only the tech-heavy U.S. Nasdaq Composite Index.
Furthermore, the Shanghai index is further from its 52-week high than 21 other major world equity markets. “I don’t know that the froth is still there, but whether it’s inexpensive enough to step back in, well, the Chinese government is still trying to slow the economy to a certain extent,” says Malcolm Polley, president and chief investment officer at Stewart Capital Advisors. “The danger is that it slows a bit too much and in that case, I think you still have to worry about valuation.”
If a stock market falls 50% and valuations are still high, then that’s a problem. But a forward price-earnings ratio of 21 for an economy growing as fast as China seems pretty reasonable. I can only conclude that investors are concerned that economic growth is going to slow way down. Gaffen’s post makes that very point:
Authorities are attempting to curtail growth in the domestic economy to head off inflation, but the Chinese economy grew at a 10.6% rate in the first quarter, a mild moderation from the 11% rate in the fourth quarter. China is dealing with the twin problems of rising inflation and the possibility that demand will slow as a result of the decline in global economic activity.
Still, there is some hope. Inflation moderated in March to an annual rate of 8.3% from 8.7%, near a 12-year high. Analysts at Morgan Stanley believe China is in position to experience a “soft landing,” saying that “external weakness will help to cool the Chinese economy without further aggressive tightening actions through blunt policy instruments by the government.”
Booming economic growth — 10.6% — sounds very good, but inflation is also high at 8.3%. Can China put a dent in inflation without choking off growth? And, as the U.S. economy slows, what happens to China’s export-fueled boom?
- Geopolitics , Investing , Money
- Comments(0)
Did you enjoy this article?
