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Stock-market mania

Robert Peston | 11:06 UK time, Thursday, 10 May 2007

As I mentioned yesterday, I am a bit concerned about the frothiness of stock markets - and I have become a bit more anxious about the risk of a fully fledged rout after looking at what is happening in China.

As the FT reports this morning, the value of shares traded yesterday on Chinese stock markets exceeded the aggregated trading on all of Asia's other markets. And what's driving stock-market mania in China is that millions of individuals are removing their cash from low-yielding savings accounts and splurging on shares.

Now there are two ways of looking at the 300 per cent rise in Chinese share prices over the past couple of years The optimistic view is that these market values capture the reality of China's turbo-charged economy, which has become one of the world's biggest in record-breaking time and surely therefore deserves a stock market of equivalent weight.

However I find it hard to ignore the paltry profits generated by Chinese companies and their poor accounting standards. Listed Chinese companies are typically trading at prices equivalent to 50 times their earnings - which brings back disturbing memories of dotcom lunacy from the not-too-distant past.

The earnings of Chinese companies may one day live up to the expectations implicit in their share prices - but it could take rather longer than investors hope.

Anyway I hope you will excuse my eeyorish tendency to see the downside. But I made a mental note to go long of cash this morning when a cab driver advised me to pile into China because "it's a sure fire winner".

Comments   Post your comment

  • 1.
  • At 11:49 AM on 10 May 2007,
  • Peter Wilshire wrote:

I agree with Robert (though I've been calling the top of the FTSE 100 since it hit 5500, so what do I know!)

Apart from China, several local issues may come home to roost:

1. Interest rates have risen from 4.5% to 5.25% (5.5% from later today?). I suspect they'll rise further this cycle to at least 5.75%, possibly 6%. That's a 25-30% increase and will hit home owners hard when they come off their latest fixed rate mortgages.

2. The FTSE largely mirrors the Dow Jones. Sooner or later, sub prime lending problems in the States will become an issue again. When that happens, the Dow will fall and the FTSE is likely to follow, as happened in February.

3. There's increasing political disquiet in the UK over Brown as Blair's replacement. If - as looks likely - the UK economy slows, Brown will be blamed. This will reduce public confidence in the new PM as well as the economy. Reduced confidence and economic uncertainty = FTSE correction. I'd be surprised if it's not back down to 6000 at some stage over the summer.

  • 2.
  • At 02:59 PM on 10 May 2007,
  • Paul M wrote:

What was the James Goldsmith Quote...

“If you see a bandwagon, it's too late.”

  • 3.
  • At 03:11 PM on 10 May 2007,
  • denis mahoney wrote:

Anyone who has read Will huttons book The Writing on the Wall' will be cautious about China. It is still run by a centralised communist party and is less than transparent in its dealings. Also there are few Chinese companies of size . Perhaps the best approach is to invest in non Chinese companies who do business in growth areas within China?

  • 4.
  • At 04:10 PM on 10 May 2007,
  • Dick wrote:

The UK is 20th in the world competitiveness league well behind countries you wouldn't think should be ahead of it.. Even New Zealand has overtaken it now.

The interest rate rise won't help and having to fund an ever growing trade deficit won't either.

China is the least of our problems except of course that investment going in there should be going in here. As the BBC article reports one of the main reasons the USA is still top of the competitiveness league is that its supported by the strength of its financial market and the ease with which venture capital for business development could be secured.

We're good at financial markets but we're utterly pathetic when it comes to VC investment.

I'll stick with drip feeding spare cash into my FTSE All Share tracker for the long term - it's a good proxy for the global economy - the accounting standards are among the best in the world - and over 25 years I am sure I wouldn't be anymore successful trying to call market tops and bottoms than I would trying to keep up with changing fund managers and their personal performances.

Anything else is a mugs game or a professionals job - either way it's too time consuming and risky for amateur investors like me.

  • 6.
  • At 09:04 PM on 10 May 2007,
  • Paul wrote:

Your taxi-driver reminds me very much of Joseph Kennedy's 'shoe-shine boys'

  • 7.
  • At 12:04 AM on 11 May 2007,
  • Naresh Sharma wrote:

50 x earnings!!

I wouldn't touch stocks in China for all the tea in.........

  • 8.
  • At 12:26 AM on 11 May 2007,
  • DJ wrote:

I agree. And the comments listed are very enlightening. I for one have an issue with business practices that have been reeking havoc on Americans as well as the rest of the world. Here are my top issues with China
1.Dafur (need I say more)
2.The practice of using poisonous materials in food products consumed by animals AND people.
3. DVD piracy
4. The recent scandal of a Hong Kong couple accused of insider trading.

I'm not saying these things don't happen in Western countries. It just seems that the policing of these despicable acts is simply not happening within the Chinese government. It's as if China is the new wild west or should I say the wild east.

  • 9.
  • At 03:58 AM on 11 May 2007,
  • Mark H wrote:

Recently on a trip to Beijing, some friends of my wife were of the view that Chinese shares will keep going up forever and dimissed my talk of share bubbles, Dot Com boom/bust and going further back the South sea bubble.

However, each time I have come to Beijing, I have been amazed at the visible redevelopment of the city, including thousands of fancy new skyscrappers; huge brand new shopping malls full of Western and Chinese goods -often at global prices - full of Chinese shoppers; and a welcome tree and shrub plantting program. You can see money is flowing in Beijing: witness the ring roads packed with new, large exepensive cars, making them look like a Los Angles freeway.

But as always, only invest(gamble) what you can afford to lose is my view.

  • 10.
  • At 08:27 AM on 11 May 2007,
  • Patrick Hoerler wrote:

All good things will eventually come to an end, especially in economic cycles.
While I would not go as far as to compare China with the dotcom bubble, I believe similar scenarios to Japan's bubble in late eighties are in order - centrally planned economy, low profitability, dubious disclosures, widespread corruption, etc..
However, the current liquidity-driven search for returns with increased risk appetite could go on for longer than we think. After all, the global economy is in good shape and benign.

  • 11.
  • At 09:22 AM on 11 May 2007,
  • Jim A wrote:

The taxi driver who said 'pile into China....' may have been related to the window cleaner who told us to 'buy to let'. James Goldsmith said it's too late once the bandwagon is visible. I think my silver coin will be placed on the James Goldsmith view. How many times will this have to happen before people learn?

  • 12.
  • At 10:44 AM on 11 May 2007,
  • Andrew Dundas wrote:

The Chinese state has a cruel dilemma: do they allow free market principles to apply, or continue to use their power to hold down the value of the Yuan? By holding down the Yuan's exchange and interest rates, a stock market bubble is encouraged which may crash leaving massive debts and dislocation. As happened a decade ago in Japan. Alternatively, China can allow the Yuan to appreciate in value and restrain export and GDP growths. That would probably risk employment growth and squeeze farmers who are still the majority population. It would also lower the value of the mountain of US Bonds held by China, and lead to questions about that financial policy. Oh dear!

share other readers concern along with Robert of buoyant but opaque China politics and market . but lets look in hindsight, which market has not its Low , whether USA, UK, Germany or Japan. I think, as China was part of East Asia 1998 financial debacle, so they must have been in better position this time to face any turmoil.. its just guess, please feel free to disagree...

  • 14.
  • At 03:11 PM on 11 May 2007,
  • Scott wrote:

No investment markets are risk free whether Chinese, UK, US or wherever.

It's all about risk v reward and how long you're investment timeframe is.

China is on its way to becoming the world's largest economy and of course will experience volatility. I've held Chinese investments for the past few years and have seen stellar returns. I know this cannot continue indefinitely, but I have a twenty year view and I feel its a risk worth taking.

Opportunities like this don't come along very often...

  • 15.
  • At 05:08 PM on 11 May 2007,
  • Kalpen Shah wrote:

I agree a PE of 50 is ridiculous. According to me India is much more attractive, trading @ 17 times and its economy is growing just at 8-9% pa which is just below the double digit growth rate of China.

  • 16.
  • At 06:54 PM on 11 May 2007,
  • Archie Bunker wrote:

I don't give a hoot if the Chinese are doing right or wrong about investing in their bubble/s - if their market crash it will be all for the good they learn a lesson in life (for the meanwhile). If the crash affects the 'West', it is great too - all you guys speculating and hankering after greed can join the Chinese amateurs in their quest to feed avarice.

Someone up here wrote a list of (moral?) reasons why not to invest in China - while he mentions that he is not saying that those things do not happen in the West, he somehow fails to notice that a heck of a lot of Iraqis are dying each day to feed the greed for (other people's) oil - that's what it is, let's not pretend we not all Blairs and Bushes. But, still, what is an Iraqi or two dying eh? So what if it is a Chinese or two killing themselves over bad investment , O Armchair Experts, eh?!

And, oh, that Will Hutton - just don't make me laugh - he was properly demolished in Prospect magazine as he made his 'case' to push his book on China (which is not selling, poor sod...). Hutton is a Blairite and look what Blair has got to with just about anything with all the advice from the likes of Giddens, and, oh... Hutton.

A look at the positive side about the Chinese bubble/s though - if there is a massive crash (I am praying to the elephant and monkey gods for that) all the devious and hapless politicians and 'experts' will blame China for everything that befall the West (well, since the West was kicked out of the East...).

  • 17.
  • At 08:36 PM on 11 May 2007,
  • Miss Margaret Campbell wrote:

Per. the last comment. Oppurtunities like this should not come along and when they do we should be moral enough to thumb our noses at them. As the investors we can determine to an extent how much immoral business practices are rewarded.
Rather than going out for dinner with your extra and wrongly gained Chinese Yuan, stay home and read a book, if to yourself, meet a friend in the book, or read to a friend and loved on, say your husband or your wife, your Gran or your child, your boyfriend,... use your imagination.
Be less dictated to by how your money is fairing and dictate that your money is used fairly.

  • 18.
  • At 10:42 PM on 11 May 2007,
  • Colin wrote:

You mean you don't have a balanced portfolio?

I don't see a problem holding Chinese investments, but you balance it against the FTSE, property, commodities, bonds etc. Categories which tend to go in opposite directions during good and bad times.

If one category is over valued at any particular point in time it'll be clear that you should be putting new cash into a different category. Y'know, buy low, sell high.

All of this nervousness is a good sign. Remember the dotcom boom when it was difficult not to get sucked in. The fact that people are being rational in the current situation suggests the bull market still has some way to go. Until we are all fully invested believing that the correction is never going to happen the markets will rise. Wait until your barber, gardener and that bloke in the pub have joined your cab driver and decided to get involved. Then things could get interesting!

  • 20.
  • At 03:02 PM on 12 May 2007,
  • James Roberton wrote:

This reminds one very much of a legendary tale told of JP Morgan, prior to the Great Crash in 1929.

While walking to a meeting, he stopped to have his shoes shined. The shoe shine boy recognized Morgan by his bulbous nose and asked the great financier for a stock market tip, claiming that he had been saving all his earnings to put into the market. Morgan duly provided the stock tip.

However, Morgan thought about this long and hard, returned to his office and declared, "If a shoe shine boy is coming into the market, it's time for me to leave".

While the story may be myth, the rest is history.

  • 21.
  • At 07:49 PM on 13 May 2007,
  • Kevin wrote:

Working daily in the stock market, I get to see how it moves and the fact is that traders are always looking for something to follow. Whether it be the S&P, Dow etc. so there's bound to be a dislocation in price globally. Factor in that the stocks tend to tag the market and other companys in its sector and you can see where the prices can move away from realistic valuations in extreme conditions. The Chinese situation will most likely turn out like the internet bubble in the u.s. where the companys were trading at ridiculous earnings multiples that were unsustainable. This isn't a problem when operating under the 'greater fool theory' where you can buy something (tech stocks 99) in the knowledge that you can sell it higher to a greater fool but at some point, someone is left holding the holding the parcel when the music stops.

  • 22.
  • At 12:27 PM on 14 May 2007,
  • paddy wrote:

I have just come back from China, and as far as I could see there is still a lot of cheap labour out there and not much wage inflation. I doubt Chinese manufacturing output will slow much soon. There was also a huge amount of over manning in service industries, like shops, hotels and restuarants. In one small pharmacy, there were a dozen shop assistants alone.

  • 23.
  • At 02:14 PM on 15 May 2007,
  • JPF wrote:

I am a bit surprised to see how many people would like to apply traditional thinking without looking at the reality.

I am from China. I have, till now, lived in UK for 10 years and became a UK citizen recently.

So I can claim I know both culture.

In China, people save really hard. I would not be surprised if my neighbour told me he has got over 1 million chinese yuan in savings just by working hard everyday. Family fortunes are passed down to children, and collecting tax is still a big issue for the government, you get the picture.

I do not even need to remind you of the reality here in UK.

So now, when some people starts to go into the stock market and wins big, everyone follows. When the institutions short their holdings because they think it is going to cool down, others buy. I agree with you guys that this is not reasonable, but is this sustainable?

I pretty much think so.

China still has huge potential. The vast amount of resource, both in human and in raw materials, and this government, so far, is the best one, IMHO.

When people has faith in the government, it is so natural to me they want to invest in their own economy.

p.s. last night I heard a story where a guy from mid-south China turned 5k pounds equivalent of money into roughly 1.5 million pounds worth of money in Chinese stock market by trading derivatives.

  • 24.
  • At 04:52 PM on 15 May 2007,
  • W8 wrote:

Reading the above all I can say is that Chinese love to gamble, preferably with someone elses money!

My dad always taught me that if something seems too good to be true, it often is.

  • 25.
  • At 10:36 PM on 15 May 2007,
  • Matt wrote:

Sell now,get ready to go very long....

  • 26.
  • At 10:32 AM on 16 May 2007,
  • JPF wrote:

Oops, I forgot to mention above, that guy who made a fortune of 1.5 million pounds equivalent, amassed this amount within the last 16 months.

It is said that he is not a gambler, but a speculator and an arbitrage taker.

He did many trades on a daily basis. Whenever he identified a chance, he would do a trade. His personal record so far is 355 trades in one day, that is one trade in less that 1 minute.

He told the journalist that there were SO MANY oppotunities out there that he was not even able to go to toilet without giving instructions on his mobile phone.

For me, I agree with some of the comments here that this is a risky market. But, profit always comes with risk. And if you know what you are doing by doing proper research, you can reduce your risk. And if you work really hard, like that Chinese guy, you might be able to win, big time, just like him.

  • 27.
  • At 12:38 AM on 25 May 2007,
  • Joy Mann wrote:

Something that hasn't changed since you joined the BBC is the tendency for BBC economics reports to assume quite a bit of knowledge. The BBC economics reporting, including yours, tends to be aimed at financial professionals and economists.

Well, the vast majority of License Fee payers probably don't understand, but a large proportion probably have financial products and savings which are subject to the market forces you describe in such a mysterious fashion.

Regarding your China post, what are you saying you think is going to happen, and what are you saying people ought to do? What do you mean you're going long of cash?

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