Mary, Mary, quite contrary on China

April 1, 2015 1:34 PM (UTC+8)

 

Remember that old nursery rhyme? A contrarian is a person who bets on the other side of conventional wisdom. Sometimes, there’s a big payout. Other times, it can get you into a heap of trouble. Asia Unhedged opines the latter may be the case with China.

Chinese property was the previous big “smart money” short. Some appear to be taking the same tack with Chinese stocks.

Bloomberg Intelligence Economics has posted an analysis that contends the latest Chinese stock rally was fueled by inexperienced local retail investors. “There was already strong evidence that the 78% surge in China’s equity markets in the past year was driven by momentum rather than fundamentals,” Bloomberg wrote. “New trading accounts and trading volumes have soared. Expectations on growth and profits have not.”

Fueling such irrational exhuberance in Chinese equities, according to Bloomberg, are a bunch of Chinese high school dropouts.

“New data from the China Household Finance Survey, a large-scale survey of household income and assets headed by Professor Li Gan of Southwestern University of Finance and Economics, provides fresh insights into who has been driving the recent rally in China’s markets. It is not reassuring,” the analysis said.

Bloomberg says Gan’s survey, which was conducted at the end of 2014 and covers some 4,000 households across the country, finds that the biggest new investors in China’s equity markets have below a high school education and relatively low levels of asset ownership.

Sheesh … does this imply that these less-than-GED types are trading in Chinese stocks because they’re dumb?

Bloomberg also prefaced its cautionary tale about the Chinese rally by recounting that famous story about Joseph Kennedy selling his stocks on the cusp of the Great Crash of 1929 after a shoe shine boy shared trading tips with him. “If even the shoe polisher is buying stocks, he reasoned, the market must be riding for a fall,” the story said.

Well, there may be similar shoe shine boys in China today, but most likely they’re investing in stocks while studying and scrimping at night to enter Beijing University.

Remember, there’s also a downside to contrarian plays – same as when the big bond shorts got killed last year.

Even Bloomberg admits in its analysis: “That doesn’t mean (the rally) can’t be sustained. China has a large population with a substantial volume of savings and limited alternative investment options. It does mean that the trajectory of China’s markets will be unpredictable, and prone to sudden reversals as sentiment shifts.”

That pretty much sounds like a normal stock market to Asia Unhedged.

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