Back in August, we ran a cover story headlined “Looking for a cheap yacht”, the premise being that, due to the credit crunch, the good times were over for the world’s big bankers – and by extension, probably for the world economy too. At the time most commentators thought that the volatility of August was a buying opportunity and the strike in the credit markets just a short-term blip.
We weren’t so sure. Even then it was clear – to us at least – that the extent of the losses related to subprime was impossible to quantify; that the big banks were going to suffer; and that credit was going to tighten for everyone from firms to credit-card borrowers. Cautious investors, we said, should ignore the consensus to buy on the dips and have a go at selling on the bounces instead.
I wonder if now might be a good time to do just that. Most markets have had a goodish autumn, but it is now clear – surely to just about everyone – that the subprime crisis has not gone away. Defaults are up; declared credit-crunch related losses are up; and so, of course, are resignations by big bank bosses.
We’re also seeing clear evidence that it is getting harder for the consumers the UK economy depends on to borrow money – be it for houses or for pointless high-street tat.
The same is true in the US, where new car sales are finally falling as – to quote The Wall Street Journal – “buyers shun debt”. Now I know that there are lots of reasonable sounding bullish arguments out there and that there are even things that we advocate buying (gold, silver, commodities and, this week, Canada).
In general, though, with inflation still a major threat and both credit and consumer spending slowing, this seems to me like a rotten time to place big bets on equities.
That is particularly the case in China. I am bemused by the constant newspaper headlines asking, “Is there a bubble in the Chinese market?” Bemused because the subject isn’t really worthy of the question. Of course there is a bubble. Look at Tuesday’s initial public offering of Alibaba.com in Hong Kong. Shares in the e-commerce firm (everyone refers to it like this, so I suspect no one knows what it does) ended the day on a p/e of 315 times, a price that, however magic the business might be, is absurd.
Then there is PetroChina (SHA:601857). It debuted in Shanghai on Monday and within a matter of hours had more than doubled to become the world’s first trillion-dollar firm. Why the move? Huge demand (Chinese investors aren’t allowed to invest overseas) and short supply (the government still holds 86% of the shares).
It is all a bit reminiscent of the “first great bubble of the modern age”, said Martin Hutchinson on Breakingviews, the South Sea Bubble. Then, due to a similar government-created shortage of supply, the South Sea Company ended up with a market value of more than five times Britain’s GDP, before it collapsed and a 105-year bear market ensued. “The historical lesson: China is due for a big crash followed by a bear market ending sometime around 2112.”