Tuesday, October 16, 2007

Too Much, Too Fast, Too Soon?

The markets in H-shares and Hang Seng index have moved way too fast, too much in too short a period of time. While I am still bullish on H-shares, especially the chosen ones such as BOC, Petrochina, Shenhua, Sinopec, CCCC and CNOOC - the movements yesterday and today look dodgy and over exuberant (to borrow a phrase from Greenspan). PetroChina shot through the roof to become the world's second-largest company by market value. The market is now driven by psychology and the need NOT to be left behind - everyone knows that is not a good strategy.

There is a lot of greed in terms of people's price expectations. Greed is good, and greed is why people are in stocks, so no problem there. Its the expectations side, when expectations are very high, it creates mania. Plus, there has been an overwhelming belief that nothing can go wrong in China - that is probably the biggest short term worry, nothing can go wrong, nothing is supposed to go wrong, surely they will not let the markets fall during the important Congress meeting...??? When more and more participants believe that nothing can go wrong, who is there to take the shares from the buyers and owners? A market that is driven by bulls and bears in roughly equal ratio makes for a better balanced market and their rise is more sustainable.

The benchmark Hang Seng Index gained 2.44 percent or 702.41 points yesterday to close at a record 29,540.78 after touching an intraday high of 29,562. Hong Kong stocks were led by oil and energy plays on higher crude oil prices. Shares of PetroChina surged 13 percent to a record close of HK$18.78, boosting its market cap to HK$3.36 trillion, eclipsing General Electric's US$420.4 billion (HK$3.28 trillion). PetroChina is now second worldwide in value to Exxon Mobil Corp's US$518.5 billion. Meanwhile, CNOOC, China's largest offshore oil company, gained 9.75 percent to close yesterday at HK$14.86.

The H-share index jumped 671.32 points or 3.52 percent to close at a record 19,752.67. Market turnover was HK$174.46 billion, compared to Friday's HK$195.98 billion. The bull run that has driven the HSI 41 percent higher in less than two months is raising concerns of a bubble. The blue-chip barometer is now trading at 19.69 times earnings - the highest since March 2004. The H-share index is trading at 31.2 times earnings. But some fund managers continued to be bullish on Hong Kong stocks, noting they are still trading at big discounts to mainland shares. The Shanghai Composite Index gained 126.82 points or 2.15 percent to close at a record 6,030.09.

Strategy - While I am still bullish on H-shares, the risks have surged appreciably in just a couple of days. I would rate this a trading market. Lock in profits and look for lower entry prices later when there are mini-selldowns (they will come). I don't think there will be a massive correction despite the mania-like run-ups, but surely the volatility will be exaggerated. Lastly, you may trade but now is not the time to gear up, or go on margin. Still good, but have a healthy profit taking attitude, you cannot make all the money, ... some risks are not worth taking.

Asset Class Returns In The USA

The brilliant snapshot of asset class returns compiled by Blackrock makes for interesting analysis. See if you can deduce any pointers from...