Stock investors display double vision

For many months, stock analysts have been trying to drum up some confidence in the moribund A-share market by alluding to the growing interest of overseas investors, including many hedge funds, that are looking for bargains.

Every positive, even if it's off-hand, comment about the Chinese stock market by the likes of Warren Buffett or George Soros has been enthusiastically promoted by the domestic media as the prelude to an influx of foreign investment capital that could help kick-start a bull run. But most investors don't seem to share the enthusiasm of these drum beaters, choosing rather to stay on the sidelines watching the most widely followed Shanghai Composite Index struggling to stay above the 2,000 level that is seen as a make-or-break psychological barrier.

Having been proven wrong so many times, even the most ardent stock market bulls are beginning to doubt whether the current market valuation is too high. This apparently prompted People's Daily to pose the question: Why has the stock market performed so badly when the economy is doing so well?

Perhaps more global fund managers are coming to realize that such a mismatch of economic factors cannot last. The improvement in economic fundamentals, indicated by a pickup in exports, in recent months has further boosted their confidence in the prospects of the Chinese stock market.

A Reuters report from Hong Kong last week stated that the shift in attitude of foreign investors toward Chinese equities is clear. Many foreign fund managers have started rebuilding their China equity portfolios, tempted by the low valuations after two years of market under-performance and new data showing that the economy is stabilizing.

Together, foreign investors have pumped nearly $4 billion into Chinese equity funds in the past two months, "trying to get in early on what they hope will be a sustained rally", the report said. The report cited Bank of America Merrill Lynch's global survey of fund managers, which showed confidence in China's economy was at a three-year high.

Michael McCormack, executive director at China-focused fund consulting firm Z-Ben Advisors, told Reuters that foreign investors are now trying to "rebalance" the fundamental mismatch in their portfolio between their direct exposure to Chinese equities and the role China plays in the global economy.

Foreign investors' enthusiasm about Chinese equities seems to stand in sharp contrast to the attitude of the vast army of domestic investors and punters who have remained shell-shocked by the market free fall in recent months. Talking to the crowd milling around every day at the large reception hall of a local stockbrokerage, a China Daily reporter filled her notebook with negative quotes showing nothing but mistrust and frustration.

A 50-something retired teacher told our reporter that she knows and cares nothing about the economy. All she cares about is the daily movement of the index. "When it goes up I am happy and when it goes down I am depressed," she said, prompting a roar of laughter from the crowd around her.

The consensus of the young and not-so-young investors in that hall lined with TV screens flashing the latest stock prices was this: Don't do anything now, wait and see what's going to happen next year.

By then, they may have to pay a high price to buy from the smart investors who are picking up the bargains now. But of course, not all shares are equal. "There is lots of stuff (in the Chinese stock market) that's cheap - some has recovery potential but then some is cheap for a reason," Stuart Rae, chief investment officer of Pacific Basin Value Equities at AllianceBernstein, told Reuters.

So, be warned.

(China Daily 12/04/2012 page8)