Peter's Perspective
5th January 2016 by Peter Churchouse

A Chinese New Year Hangover

“Poor Chinese economic data also dragged down regional stock markets in what shaped up to be the worst trading to start a year, with Hong Kong brokers labelling it a “black” debut that they believe could be an omen for poor performance in equities in 2016.”

~ South China Morning Post, Front Page, 5th January 2016

If you’re looking for an omen, I suggest you try Richard Donner’s 1976 classic horror movie “The Omen” rather than the Chinese stock market.

Believe it or not, the first calendar day of trading in a given year has little bearing on the full year performance!

Don’t believe me?

Well, in 4 of the last 5 calendar years, the first days trading has moved in the opposite direction to the full year performance of the CSI300 index.

As for yesterday?

We saw some weak manufacturing data and on top of that a ban on major shareholder selling is supposed to be expiring on Friday.

During the height of last July’s Chinese equity rout, the Chinese government imposed a 6 month ban on shareholders who hold more than 5% in an A-share listing from selling to limit further equity downside.

Goldman Sachs reckon the ban has kept US$185 billion of shares off the market.

The market hit its newly launched circuit breaker which suspends trading for 15 minutes when the index falls or rises by 5%, and halts the session when the index moves 7%.

Note that I said “supposed” to expire earlier.

The China Securities Regulatory Commission (CSRC) haven’t yet specified whether or not this ban will actually be lifted according to Bloomberg.

There’s little point speculating which way the CSRC will move.

The ban could be lifted, it could be extended, or it could be modified. Who knows?

If it’s lifted then yes, it’s likely we’ll see some more short-term downside pressure.

But we’ve said time and again that we expect periodic bouts of volatility in China’s stock market.

So we do what we always do: ensure we maintain sensible position sizes, and act on our stop losses if and when they are triggered.

Just remember, H-Shares (Chinese companies listed in Hong Kong) are not expensive on the whole.

The Hang Seng China Enterprise Index (HSCEI) trades at less than 7 times 2016 earnings, near its historic lows. This compares with 16.5 times earnings for the MSCI US Index.

Put another way, it means you are paying 135% more for a dollar of earnings in the U.S. as you are in the China H-Share market.

We still believe there are great opportunities to pick up double-digit growth companies amidst the rubble right now (see our January 2016 edition of The Churchouse Letter “A Billion Shades of Grey“).

Good investing,

Peter Churchouse

P.S. Our 2016 Investment Outlook is coming shortly. I apologise for the delay. The hold up is due to some extremely heated debate on one of my calls in particular.

I’m being told flat out by the team that I’m simply “wrong”.

The report will be with you shortly once this mutiny has been quelled.

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