Stock Market Hits A New High
Stock Market Hits A New High. Too Bad for the NASDAQ and NYSE!
Shares have jumped to another one-year high! Not in New York or London, of course. The action is now in Shanghai. The market there is up 61% this year alone!
With the benchmark Shanghai Composite Index roaring towards the 3000 mark, some investors are wondering about playing the Shanghai market. That’s not easy to do because China restricts most foreigners from buying “A-shares” on the Shanghai Stock Market.
A few foreign institutional investors are allowed to buy and sell shares in Shanghai, but unless your name is Morgan Stanley you’re not one of them. You could buy into a mutual fund that invests in Shanghai’s A shares but we don’t recommend it.
Here’s why.
Most importantly (as I pointed out in a recent conference call), shares of Chinese companies are much cheaper when we buy them as ADRs. Any A-share traded in Shanghai will be selling for a substantial premium compared to the price of the same company listed as an ADR in New York, or even as common stock in Hong Kong!
Securities analysts in Shanghai are predicting that the bull run will continue. Guotai Junan Securities declared to China Daily that the A-share market will remain in an upward trend due to a recovering economy, and the performance of listed companies. Anxin Securities is even more optimistic, predicting that this round of growth could last to the second quarter of 2010. Anxin says the Shanghai Composite Index could rise to 3,800 points from the current 2,900.
Don’t believe it.
A-share valuations are already through the roof. The average price-to-earnings ratio multiple of stocks in Shanghai has hit 28, obviously a risky high. Average price-to-book ratios, at 3.2, are also uncomfortably high. Shares of comparable companies traded as ADRs are often available in single digit or low double digit valuations. Obviously the bargains are in the ADR market and the risk is in Shanghai.
Even worse, China Business News says that bank loans worth an estimated $170 billion were invested directly in the stock market in the first five months of this year. That’s an awful lot of margin borrowing and speculation, even for Shanghai.
There’s one more factor that may bring the party in Shanghai to an early end. The resumption of initial public offerings will absorb some new capital. Even more significantly, the unlocking of non-tradable shares may soon result a big lump of new securities being dumped on the Shanghai market. This will dilute existing share values.
As usual, the “buy low, sell high” slogan applies. Shanghai is expensive and may be due for a correction when massive bank lending programs mandated by Beijing dry up. If Beijing turns off the taps on new loans, look out below.
We’re still bullish on the Chinese economy. We’re just worried that Shanghai has gotten ahead of itself.
China Stock Digest subscribers are still realizing double digits gains buy buying much cheaper Chinese ADRs.
This is no time to risk getting Shanghaied.
Committed to your PROFITS from China,
Jim Trippon
Editor in Chief
China Stock Digest
Http://www.chinastockdigest.com
P.S. Our July issue will be ready tomorrow! China Stock Digest has outperformed the stock markets by 22% YTD. If you would like more information about China Stock Digest and how you can earn 20%, 30%, 50% or more profits on your investments in China visit: http://www.aweber.com/b/ahg_
