Yesterday, as has been the case for much of the past few months, Chinese stocks staged another amazing rally.
Led by brokerage firms, the benchmark Shanghai Composite put close to 2%, extending the indice’s recovery from this year’s low to 28%.
The catalyst for the rally was news over the weekend that China’s stock market regulator, the CRSC, will allow the resumption of IPO listings following a ban put in place amidst the stock market rout in mid-June.
According to analysts at Credit Suisse, the resumption of IPO listings is likely to lead to further gains in Chinese stocks in the period ahead. They suggest it will introduce additional investor funds into the market, particularly as as the returns from an IPO subscription are, on balance, significantly higher than those in the money market and for wealth management products (WMPs).
“Individual investors believe the upcoming IPOs will bring them ‘risk-free’ returns as usual—they will move their money from the money market and WMPs to the equity market to chase better opportunities,” Credit Suisse note.
Risk-free returns, from a market that rose 150% in the year to June before crashing nearly 50% over the next three months?
Credit Suisse explain how the government essentially guarantees substantial investor returns, ensuring herd-like behaviour before and after a new company is listed.
“In 1H 2015, the new stocks were priced at 20-23x P/E, while the ChiNext market was traded above 70x P/E. Therefore, the new stocks generally increased 2.5x in the first 20 trading days,” they note.
“The new stock prices were controlled by regulators at ‘reasonable valuation’ to protect the interests of small retail investors. Therefore, the investors believe the return of buying new stocks is risk-free return, which is sort of guaranteed by the regulator.”
BEIJING—China’s economic slowdown has pummeled global suppliers of raw materials and industrial equipment, but business has remained surprisingly brisk for companies that cater to the country’s growing upper-middle class.
Indeed, Chinese consumers appear to be weathering the slowdown better than the economy’s traditional growth engines like manufacturing and construction, which are sputtering. At least for now, they have redrawn the line between winners and losers.
Among the winners are sportswear maker Nike Inc., coffee-store chain StarbucksCorp. , clothing retailer Hennes & Mauritz AB and gadget giant Apple Inc. Behind their success are people like 24-year-old Jiang Yang, a technology officer at a state-run factory in the northern Chinese city of Shenyang, who recently bought a new rose-gold Apple iPhone. Not only have Mr. Jiang and his affluent young peers been a bright spot in China’s economy, but many economist think they hold the key to its long-term growth.
Former Fidelity chief Edward ‘Ned’ Johnson III had the idea for Luminex. Photo: Brian Snyder/Reuters
BOSTON—The most exclusive new club on Wall Street opens for business next week and there are a few things you won’t find: members with under a billion dollars or high-frequency traders.
Those are among the rules laid out by the founding members of Luminex, a private trading platform designed to give the world’s largest asset managers a new place to buy and sell large blocks of stock.
Large asset managers have complained in recent years that exchanges are now rife with high-speed traders who rapidly change the prices of their bids and offers to take advantage of heightened interest in a stock, cutting into profits of the firms that place them. “Dark pools,” a type of private trading venue originally designed to help institutions anonymously trade, have had their own problems with keeping client orders secret.
In response, last year a group of firms led by Fidelity Investments began work on a trading platform that would provide what it calls a cheap and secure solution. In addition to Fidelity, other Luminex owners include BlackRock Inc., the largest money manager in the world by assets, Invesco Ltd. and Capital Group Cos.
Luminex is looking to potentially win market share from other dark pool operators that focus on block trading, such as Bids Trading LP, Liquidnet Holdings Inc. and Investment Technology Group Inc. Those venues account for more than 200 million shares traded every week, according to the latest data from the Financial Industry Regulatory Authority.
In interviews at the Boston offices of Luminex Trading & Analytics LLC, executives detailed for the first time how the platform will operate. Luminex is technically a dark pool, too. But it stands apart from the other roughly 40 dark pools because of strict membership requirements, a low-cost structure, and rules that encourage trading large amounts of stock in each transaction, analysts said.
Here is how it works:
Luminex only allows institutions with a billion dollars or more under management and a “long-term investment strategy,” so that means no high-frequency traders or quantitative hedge funds.
Apple has recorded the biggest annual profit in corporate history, with record sales of the iPhone helping it to make $53.4bn (£35bn) in the last 12 months.
However, Apple warned that growth is likely to slow down significantly in the crucial Christmas period, and sales of the iPad fell by a fifth to their lowest level since 2011.
The company predicted that sales in the current quarter would be between $75.5bn and $77.5bn – as little as 1pc up on the same period last year – partially due to a strong dollar.
Apple has been facing questions about its ability to maintain the tremendous growth that propelled it to a $750bn value this year, as China’s economic troubles raise fears about customer demand for its pricey devices.
Analysts have also suggested that the Apple Watch, the company’s first new product category since Steve Jobs’ death four years’ ago, has got off to a slow start since launching earlier this year.
Nonetheless, Apple said revenue increased by 22pc to $51.5bn in the three months to September 26, the final quarter of its fiscal year. The company sold 48m iPhones, an 22pc increase, during the quarter, which included the first two days that its new 6s and 6s Plus models went on sale.
Android users are switching to the iPhone at a record rate, the company said.
Chinese e-commerce giant Alibaba Group Holding Ltd is lobbying hard to stay off the U.S. Trade Representative’s blacklist after coming under renewed pressure this year over suspected counterfeits sold on its shopping platforms.
Re-inclusion on the USTR’s annual list of the world’s most “notorious markets” for sales of pirated and counterfeit goods, while not carrying direct penalties, would be a blow to the company’s efforts to shed perceptions that its sites are riddled with fakes and that its anti-piracy policies are inadequate. It could also hurt Alibaba’s beleaguered share price.
Two Alibaba sites – the business-to-business platform Alibaba.com and the hugely popular Taobao Marketplace – were on the USTR’s “Notorious Markets” list from 2008. Alibaba.com was removed in 2011. Taobao was taken off in 2012 for its “notable efforts” to work with rightholders to clean up the site.
On September 10, the USTR called for public input as it formulates its latest list, expected in the coming months. At least three industry bodies have publicly responded with criticism of Alibaba, alleging counterfeits remain widespread on its sites and that the company is difficult to work with or inefficient when seeking redress.
The company’s new government affairs chief, Eric Pelletier, who took up the post in June, has sent two formal letters to the USTR this month, including a rebuttal of the industry group criticism.
Last week, Pelletier and an Alibaba lawyer met with an inter-agency working group coordinated by the USTR to discuss Alibaba’s anti-counterfeit efforts, a source with knowledge of the matter said.
In his letters, Pelletier says Alibaba has gone above and beyond in dealing with the problem, but that primary responsibility for policing and deterring infringements rests with brand owners, according to copies seen by Reuters.
He said the company had made it easier this year for brands to remove listings of suspected fakes while toughening penalties for merchants who violate company policies.
“When you step back and look at our overall efforts to combat illicit activities, our track record is clear. We are certainly not perfect, and we have a lot of hard work ahead of us…we will continue to do everything we can to stop these activities,” he wrote.
Others think Alibaba should do more.
The American Apparel and Footwear Association pressed the USTR to re-instate Taobao on the blacklist due to Alibaba’s “unwillingness to make serious reforms” and failure to address the organization’s concerns.
After some gut-wrenching volatility in August, global markets have settled down in the past couple of weeks.
They have also rebounded nicely off the August lows.
As markets have calmed, the debate about whether we’re in the early stages of a full-on crash has quieted.
But don’t get too comfortable.
This is still an open question.
At times like these, it’s helpful to get a historical perspective.
And what you find when you do that is that no one who is concerned about a crash should take comfort in the market’s recent stabilization.
Because market crashes take time.
The market’s recovery from the August lows might, in fact, be a “buying opportunity” that is the beginning of another surge to record highs.
But it also might be one of those bear-market rallies that have punctuated nearly every major market collapse in history.
The charts below, from portfolio manager John Hussman of the Hussman Funds,* illustrate this phenomenon.
The charts show how the last three major market crashes were preceded by initial drops of 10% to 15% followed by sharp rebounds like the one we’re experiencing right now. These rallies seemed comforting and encouraging at the time. But then, just as many traders had decided it was safe to get back in the water, the real crash began.
First, 1987. In 1987, stocks peaked in August and then sold off sharply. Then they began a rally that, by early October, had recovered almost all of the losses. The top chart shows this rally, which was presumably quite comforting to traders at the time. The bottom chart shows what happened next.
A deepening slump in Chinese shares is just what Di Zhou has been waiting for.
Ms. Zhou, who manages $11 billion at Thornburg International Value Fund, is snatching up shares of Kweichow Moutai Co. , whose distilled Chinese liquor has been around since the Qing Dynasty. The shares have dropped 22% since June, but she said the stock looks like a good buy thanks to high profit margins.
She isn’t alone. Global investors bought 21.4 billion yuan ($3.4 billion) worth of Shanghai-listed stocks in August through a trading link with Hong Kong, the largest monthly sum since December 2014. In July, investors redeemed 31.5 billion yuan of shares.
Despite dour economic reports and volatility rattling Chinese markets in recent weeks, many portfolio managers believe Chinese stocks are worth a look following a 40% decline in the Shanghai Composite Index since its June 12 peak. They are scouring for insurance, health-care, food and technology companies that they think are poised to benefit from China’s transition to a more consumer-oriented economy.
They are buying Hong Kong-listed China Mobile Ltd. , the biggest mobile carrier in the country, and China central-government bonds whose returns have outstripped U.S. Treasurys since the end of 2013. They are betting on e-commerce behemoth Alibaba Group Holding Ltd. , Tencent Holdings Ltd., whose instant-messenger service is ubiquitous in China, and on Baidu Inc., a Chinese-language search engine more popular than Google Inc.
The selloff has been “indiscriminate,” said Charlie Awdry, who manages about $1.2 billion in China-focused funds at Henderson Global Investors. Markets across the world have suffered large declines and unusually wide swings since Beijing surprised investors Aug. 11 by devaluing its currency.
People ride a double bicycle past a logo of the Alibaba Group at the company’s headquarters on the outskirts of Hangzhou, China. Photo: Reuters
In response, Mr. Awdry has been buying U.S.-listed Chinese shares such as Alibaba, which is down 26% since June 12, losing $60 billion of market value. Overlooked, Mr. Awdry said, is that the e-commerce firm is “a great cash-flow-generative business.” Alibaba’s net operating cash flow rose 50% to $6.79 billion in the year ended in March.
A slowdown in China’s economy is widely understood to mean less demand for raw materials, meaning investors should avoid metals and mining stocks, many traders and analysts said. But other sectors will benefit as the middle class deepens, said Samuel Le Cornu, co-head of Asian equities at Macquarie Investment Management, which manages $264 billion.
One way to bet on this trend is to buy stocks of Chinese insurers, which got battered in the recent selloff but carry great potential as more people look to protect their families by taking out life-insurance policies, Mr. Le Cornu said.
Among his top picks is Hong Kong-listed China Taiping Insurance HoldingsCo. , which fell 35% in the recent crash but has still doubled in value over the past two years. Insurers remain relatively cheap, say investors who are buying the shares: their shares in Hong Kong trade on average at 10 times trailing earnings. Taiping trades at nine times its last year of profits.
Crude oil prices crashed 60% from highs last year, rebounded for a few months this year, and then tumbled into a bear market.
Many in the oil market attributed the collapse to a market that was heavily oversupplied.
According to the US Energy Information Administration, crude oil stocks are currently near an 80-year high.
But as Bloomberg’s Simone Foxman and Saijel Kdishan report, Hall’s most recent letter to clients said, “the world, whilst moderately oversupplied, is not awash in oil.”
Hall’s Astenbeck Capital Management hedge fund was, however, crushed by the ugly downturn in oil prices two months ago and lost about 17% in July — its second-largest loss ever. The fund was flat in August.
According to Bloomberg, Hall said in his latest note to clients there’s still room to store about 200 million barrels of oil, adding that current prices reflect a “worst case scenario.”
Again, official data from the EIA show that US crude stockpiles have definitively surged within the past year, though it seems that Hall doesn’t think this as dire a signal for the market as current prices reflect.