It seemed as if the sky was about to fall yesterday with news that Beijing will push banks to restrict their lending. Local media reported that the country’s two biggest banks had decided themselves to put a lid on their 2009 lending targets in a move that would significantly slow overall Chinese credit growth in the second half. Commodity prices had one of their biggest falls this year along with many emerging markets and commodity related stocks. We are not surprised by the market’s response to the “news” and given the degree to which the Chinese stock market has advanced over the last few months a fall by 5% from time to time should not be unexpected. Bear in mind that it is nothing for the Shanghai comp to put on 2% in one day so a fall of 5% is merely two good days worth of performance.
Could this be the beginning of the end for the advance of the Chinese stock market? We don’t know, all we can do is watch and see how quick the market is to repair the damage of yesterday. Given the strength of the underlying market we suspect that the bulls’ legs are still strong. Usually problems in the market show up first in small caps, but as far as the Shanghai market is concerned small caps continue to register multi-week highs. Overbought you might say? Perhaps, but if there is one thing that we have learnt over the last 20 years of investing, what seems overbought can, and often does, get a whole lot more overbought. Granted the Shanghai comp cannot keep rising forever but it is it appears that it is going to be materially higher by year end.
It is interesting to note that the Shanghai Comp led world equity markets out of the crash last year, will it lead world equity markets into the next tradable bearish phase? We suspect that it has a good chance of doing so, but that is some way off yet.
Our global wealth builder portfolio (Earnslaw) which consists of just 12 ETFs and is the vehicle, in which we manage our retirement funds, is up 26% since the start of the year. Subscribers are privy to the holdings, weightings and trades prior to us executing them.
