Investors Split on Chinese Stocks
BEIJING -- Many of the world's big investors may have had enough of Chinese stocks after a record-breaking run, yet the enthusiasm of the country's own investors for local stocks is only increasing.
Whom should you listen to?
Even if domestic investors are right, it could make little difference to the China-focused funds available to investors who are outside the country, as access to domestically traded shares is so limited. Those investors might be better off taking investing cues from big international institutions than Chinese investors operating in what remains a closed financial system.
"Generally, the medium- or long-term prices follow the fund flows," said Michael O'Sullivan, senior equity strategist at State Street Global Markets.
His company's data on the holdings of global institutional investors show that they started selling overseas-listed Chinese shares as early as January, and haven't yet returned to the market -- despite continuing gains in domestic shares as local funds continue to pour money into stocks listed in Shanghai and Shenzhen.
Both domestic and foreign investors are generally optimistic that the nation's economic growth and financial overhauls will continue. But they can differ on how those trends will affect stocks: many domestic investors say the prices of their shares should also steadily increase, while some outside China feel today's rich valuations leave little room for prices to rise.
Thus, the performance of Chinese stocks on various exchanges is becoming increasingly schizophrenic, posing a challenge for investors trying to understand where their holdings could be headed.
The split personality dates back to China's decision -- when its own stock markets were in their infancy -- to get many of its major companies listed on international exchanges like Hong Kong and New York instead. That allowed global investors to trade shares of China-based companies, though such stocks remain mostly unavailable to Chinese citizens because of currency controls and other restrictions. Similar barriers mean that the Shanghai and Shenzhen exchanges -- where domestic investors trade -- are still largely, though not entirely, off-limits to international investors.
Both domestic and overseas-listed Chinese stocks had a great year in 2006. But because of their separate investor bases, the different kinds of shares have often performed differently, as they are doing this year.
The MSCI China index, which measures the performance of the overseas-listed Chinese stocks available to international investors, fell 2.3% during the first quarter of 2007. Benchmark indexes for stock markets in slower-growing economies like the U.S., Europe, Japan and Australia performed better. Yet China's domestic shares, as measured by the corresponding MSCI China Class A share index, were up a stunning 36% for the quarter.
That is particularly surprising because it was the domestic market -- particularly Shanghai -- that grabbed the headlines with the big plunge on Feb. 27. However, that turned out to be just a blip in the local markets' rise. By contrast, international investors had begun pulling out of Chinese stocks well before that crash, and have continued to do so after it.
"Investor sentiment turned suddenly in the week ending February 7, a full three weeks before the big selloff in China's equity market," said Brad Durham, managing director of Emerging Portfolio Fund Research. Since that date, international investors have taken out about $3.1 billion from the China-focused mutual funds tracked by his firm, he said.
While some money moved back into Chinese funds in the last week of March, it hasn't made up for the earlier losses. That is part of a broader shift in sentiment away from emerging markets: for the 2007 first quarter, Emerging Portfolio recorded a net outflow of $1.67 billion from the emerging-markets funds it tracks, compared with a net inflow of $23.26 billion a year earlier. Now, funds that invest in stodgier developed markets are getting most new money.
"We've seen institutions build up holdings of emerging markets over the last two years," said Mr. O'Sullivan of State Street. But after the strong run those stocks have had, institutional investors are trimming their positions and getting more selective. "They've been gravitating to cheaper regions and cheaper sectors and selling the more-expensive ones," he said. "Relative to their history, emerging markets are expensive."
The MSCI China index is trading at 19 times trailing earnings, high by emerging-market standards. The MSCI China Class A index of the domestic market is about 25% more expensive at a price-earnings ratio of 24 -- but that hasn't yet spooked local investors.
"I think foreign investors' concern about Chinese stocks has only a very limited influence on Chinese domestic investors," said Lin Yixiang, chief executive of TX Investment Consulting, a mutual-fund researcher and distributor. He thinks domestic investors tend to understand the local market better, and are therefore right to be bullish.
Even bulls will concede that valuations for Chinese stocks are high. What matters more, they say, is that share prices should eventually be backed up by rapid growth in corporate earnings. And there are also structural factors in the Chinese economy that appear to be encouraging more people to buy stocks, creating a steady push for prices to rise.
Li Quan, vice president at Bosera Asset Management, a fund company that manages about 82 billion yuan ($11 billion), points to China's demographics as a bullish factor for the market. A huge chunk of the population is now in their prime earning years of 30 to 45, he says, and therefore want to invest the savings they are accumulating.
Low rates on domestic bonds and savings accounts are also pushing more investors toward the local stock market -- particularly as inflation has picked up in recent months. Last week, the central bank released results of a survey of 20,000 households in mid-February that shows surging domestic interest in shares. More than 30% of the households felt it was worthwhile to invest in stocks or mutual funds, compared with fewer than 19% in a similar survey in the last quarter of 2006. As international shares still aren't an option for most investors, given China's restrictions on the movement of capital, local stocks end up being the main beneficiaries.
From: Wall Street Journal, By ANDREW BATSON
Date: April 4, 2007 Back