27 March 2019
Chinese iron ore miners may see lower profitability this year due to low commodity prices. Photo: Bloomberg
Chinese iron ore miners may see lower profitability this year due to low commodity prices. Photo: Bloomberg

A shares facing rising risk of sudden market slump

The Shanghai Composite Index soared more than 50 percent in 2014, making it a star performer worldwide. The A-share boom looks set to extend into the new year, but nobody knows when the bubble may burst.

A shares have surpassed Japanese stocks in market capitalization thrice in history, the first being in October 2007, the second in 2009 and the third in December 2014. Is this a blessing or a curse? 

The asset bubble stemmed from lower interest rates, although the US Federal Reserve ended its quantitative easing in November 2014. By the end of last year, global monetary supply has jumped fourfold from 2008 levels. 

As a result, yield-bearing investments including bonds, stocks and property have all risen, but gold has been on the decline after hitting a record high of US$1,920 per ounce in November 2011. Prices of other raw materials, commodities like oil, and industrial products have all dropped.

Global disinflation may have emerged if central banks did not pump massive money into the financial system between 2009 and 2014. After US Fed wrapped up its QE, central banks in China, Japan, the eurozone and even the United Kingdom continued to play the same trick given the rising pressure of disinflation.

As we all know, when prices go down, people hesitate to buy. That’s why you are in no hurry to buy a new television set. However, many are eager to buy an apartment as they believe property prices are still on the rise. However, once their expectations are not met, a large number of potential homebuyers may disappear just as in the third quarter of 1997 and second quarter of 2003.

Biotech is future 

In the era of disinflation, ideas are more valuable than products. The IT era has lasted for around 50 years, and biochemistry should be the thing for the future. The life span for today’s babies is likely to reach 100, and most incurable diseases will be licked in the next two decades. Therefore, people in their 80s would still be energetic in the future. As such, investment should focus more on stocks with “ideas” rather than on “value stocks”.

Besides, we should always remember that “the bull climbs the stairs but the bear jumps out of the window”.

The bull market usually gathers momentum gradually, and could last several years. For example, the Hang Seng index has maintained its bull market cycle, which began at 10,676 points in late 2008 and hit a peak of 25,363 in 2014.

By comparison, stock prices usually experience free falls in a bear market cycle. And it usually lasts no more than three years.

Take oil price as an example. Crude price slid to US$63 per barrel from US$114 within six months in 2014, showing a typical bull market. Meanwhile, SPDR S&P Oil & Gas Explore & Prod (ETF) rose from US$30 to US$85 over the course of five and a half years until June 2014, but the stock fell back to US$50 within the past six months, confirming that oil is in a bear market.

Also, it took the shares of Galaxy Entertainment (00027.HK) five years and three months to rise to HK$84.5 in January 2014, but only 10 months to plunge to HK$41.45 in the year-end. That is a clear sign that Macau gaming has entered a bear market.

However, more Chinese companies look set to grapple with lower profits this year. For example, Chinese iron ore miners spent as much as 700 billion yuan (US$112.6 billion) in 2008, and their iron ore projects now come on stream just as market prices stay below US$70 per metric ton while production costs soar above US$80.

Chinese monitor producers also ramped up production last year, and many of them would suffer from loss if sales of computers and TV sets fail to shoot up in 2015.

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Chief Adviser at the Hong Kong Economic Journal

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