China’s stock market was a roller coaster in 2012, and those investors with a weak stomach for unpredictability probably found the ride unpleasant.
-Mark Mobius, executive chairman, emerging markets group, Frankling Templeton
China’s stock market was a roller coaster in 2012, and those investors with a weak stomach for unpredictability probably found the ride unpleasant. It’s true that by many measures last year’s weak market performance in China’s A share market was disappointing, but in a market of this size the story isn’t all good or all bad, so unlike the market masses, I remain confident about China’s prospects and continue to search for long-term investment opportunities in China. As the late Sir John Templeton famously said, “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
For instance, from my team’s value perspective, China’s local equity market appears relatively cheap at the moment with the Shanghai A shares average price/earnings ratio at 12 times, as of mid-January 2013.1 Equity valuations overall are currently not much above their 2008 lows, although we believe earnings downgrades may have peaked.
Retail Investors Swing the Market
In the early part of the past decade, China’s local equity market charted a bullish course. The Shanghai Composite Index (of A and B shares listed on the Shanghai Stock Exchange) rose from about 1,000 in 2005 to above 6,000 in October 2007. It then crashed, taking many local investors with it. The market was then able to regain some lost ground, but in December 2012, it fell back to a four-year low, and the index stood just above 2,300 as of mid-January. Retail (individual) investor participation accounts for about 80% of the Shanghai and Shenzhen A share markets. That being the case, retail investor sentiment is a driving force behind market fluctuations. (For more information on the different equity markets in China, read my previous post, “The ABCs of China’s Share Markets.”)