- Blame it on Warren Buffett. It wasn't until the legendary
Buffett surprised the investing world by purchasing a stake in PetroChina
last April that the China story truly pierced popular consciousness.
-
- Ever since, we've been bombarded by stories about the
Chinese economic miracle in magazines and newspapers - I even chipped in
with one in last Saturday's Gazette about companies setting up in China.
-
- There are plenty of reasons for the excitement. China
has the fastest-growing major economy in the world and has produced some
of the best stock-market gains for investors.
-
- The Hong Kong H-share index of China-incorporated companies
more than doubled last year while the so-called red-chip index that tracks
Hong Kong companies with their headquarters and operations in China advanced
41 per cent. Several recent initial stock offerings by Chinese companies
have been massively oversubscribed in Hong Kong.
-
- If past experience is any guide, now is about the time
that Canadian mutual-fund investors start thinking: Hmmm, I should be getting
some of that Chinese action for myself.
-
- Resist the urge. International investment professionals
warn it's past midnight for the Chinese stock-market party and the lights
could be snapped on at any moment.
-
- Eric Roseman, who advises foreign clients on international
markets, said China's economic outlook will make the Chinese, Hong Kong
and Taiwan stock markets among the best in the world over the next 10 years
and beyond. But things are looking pretty overheated right now.
-
- The media attention alone is a bad sign. It's reminiscent
of emerging-market enthusiasm in 1993-1994 and 1996-1997 and the tech bubble
of the late 1990s - episodes that all ended in tears for investors.
-
- "Euphoria is just dangerous," said Roseman,
president of Montreal's ENR Asset Management Inc., where he advises non-Canadian
investors. "There is no margin of safety right now for new investors
in the China story. You would be smart to wait for the markets to pull
back."
-
- Roseman believes chances are good that Chinese authorities
will revalue the local currency, a move that would increase its value against
the U.S. dollar. That would hurt exporters and could be the catalyst for
a selloff in stocks. He also observed that markets around the world have
become increasingly synchronized with New York, where he believes stocks
are now richly priced.
-
- Hans Black, whose Interinvest Consulting Corp. manages
$3 billion U.S., expressed similar concerns about Chinese stocks and said
his firm is in selling mode.
-
- "The stocks have just gone through the roof,"
Black said. "There may be good (economic) growth, but some of these
things are up four- or five-fold. So it's just not a place we would put
new money."
-
- He believes there is over-capacity building up in Chinese
manufacturing and questioned whether consumers in the U.S. and elsewhere
will be able to absorb all that is being produced.
-
- A dissenting view was offered by Chen Zhao, managing
editor of China Investing Strategy in Montreal. He readily concedes that
Chinese stocks are showing the effects of a speculative mania, but argues
that such manias can go on far longer than anyone expects.
-
- He noted the current rally still has a long way to go
before it reaches the heights of 1996-1997 when the red-chip stocks rose
350 per cent. It is also underpinned by a much stronger corporate profit
picture. Zhao said it's hard to see in the short term what might trigger
a selloff: He doesn't subscribe to the idea of a large appreciation of
the Chinese currency and doesn't foresee a tightening of interest rates.
-
- "Those guys who are talking about a collapse or
an end to the mania will be ultimately right," he said. "But
the question is timing. Timing is hugely important. This thing could double
from here."
-
- Still, anyone who wants to jump into Chinese equities
at this point better know when to get out. The 1996-1997 rally ended with
prices collapsing 90 per cent.
-
- Originally published 1-16-4
- ©2004 Montreal Gazette
- © CanWest Interactive Inc. All rights reserved.
|