Chinese stock markets and fear of its hard landing has played havoc on commodities and scaring equity investors globally. But doesn't it feel like it's getting far too much? Oil at $30 with just around a million barrel oversupply when half the world production of 95 million barrels per day is making cash losses at current prices. Similarly doom Sayers are predicting crash in Chinese economy and thus a crash in global stock markets. Lets look at some facts behind Chinese stock markets and if it really can hurt global investors and markets.
|CSI 300 5 Year Chart|
1. Unlike mature markets of Europe, America, India etc, Chinese stock markets have more than 80% retail investors with barely 2% foreign holding. So a 50% crash in Chinese market would affects these foreign investors portfolio by just 1%. BIG DEAL!
2. Shanghai composite has risen 250% in two and a half years between 2013 to Mid 2015. This happened mainly due to shift of money from real estate to stock markets. Margin lending facility, which was absent in china prior to October 2011, added fuel to the rise.
3. In-sipte of all the noise and talks of crash in Chinese stock markets, CSI 300 actually delivered 6.5% of positive return in 2015 after giving more than 50% return in 2014. The state of the markets currently looks more like that the mania has just ended and mean reversal is happening.
4. Majority of retail participants have been gambling and didn't understand anything fundamental to investing in stocks. As a result majority of stocks went ridiculously expensive. It is also believed that about two third of new equity investors left school before the age 15 with 6% of them almost illiterate.
5. Chinese real economy isn't that bad per se. Even if it can grow at 5% per year for next decade that's still the second best after Indian GDP growth rate. Chinese have proved themselves over last couple of decades and the shift from an investment driven economy to a consumption oriented economy was never expected to be smooth but doubting their capability to achieve what they desire is little too early for the country which became the world second largest from being a 3rd world country.
6. Indian economy is the only sweet spot in BRIC nations and is just at the inflection point for major economic activities to pick up. Low commodity prices specially oil, under utilized capacities in manufacturing sector, benign inflation, GST rollout and rise in govt spending will all catapult Indian economy to a sustained growth path over many years and thus benefiting equity investors.
So think twice before you panic sell just because Chinese stock market is behaving irrationally or rather rationally :)