When a company triples in value on its first day of trading, you can be pretty sure things are getting ahead of themselves.
And when Warren Buffett, one of the world’s most successful investors, has already sold out, it’s “a pretty good indication that there is better value to be had elsewhere”, says Tim Murphy on Morningstar.co.uk.
Oil company Petro China’s (601857) initial public offering (IPO) on the Shanghai A-shares market earlier this month valued it at $1trn, more than Exxon Mobil – yet the group brings in only a third of the revenues of its nearest competitor. But investors in the group can hardly be blamed for ignoring fundamentals – the rest of the Chinese stockmarket is just as exuberant.
Not that investors in China and Hong Kong are worrying. China Equities is the top-performing fund sector this year, according to Morningstar.co.uk, returning 62% in the year to 15 November. Jupiter China is up 92% on the year, Gartmore China Opportunities 96% and Invesco Perpetual Hong Kong and China 74%.
But with the market now trading on a p/e above 50, “the economy risks overheating”, Qu Hongbin, HSBC’s chief China economist, tells Bloomberg. Inflation is at a decade-long high of 6.5%. That’s prompted the Chinese central bank to raise interest rates six times this year, with further hikes likely.
But despite the tightening, investment in construction, factories and other fixed urban assets totalled 8.9trn yuan ($1.2trn) between January and October, opening China to the risk that it will have far more factories than it needs if the US slowdown gathers pace.
“At this rate of increase, it is worrying,” said Standard Chartered economist Kelvin Lau on MarketWatch. “A sharper-than-expected slowdown in global growth could curtail China’s exports and expose the severity of its overcapacity problem,” agrees Sun Mingchun, an economist at Lehman Brothers in Hong Kong.
A full 21% of Chinese exports still head for the US. Fears of a bubble in the market persuaded Invesco Perpetual to pull the launch of a China fund this September.
But others are more sanguine. A US slowdown would not affect China as much as many expect, says Shelley Kuhn of the Neptune China fund, “given that the Chinese export base is already well diversified”.
Meanwhile, David Fuller of Fullermoney believes China’s bull run will continue at least until the 2008 Beijing Olympics, and that overall it is, “a great long-term investment”, although investors should be “prepared for some roller-coaster moves.
“Wait for a bad day in the markets and then buy”, agrees Mark Dampier of Hargreaves Lansdown in the Daily Mail. Fuller likes the Dublin-based Atlantis China Fortune Fund (+353 1 670 0660).