Chinese Stocks - Finely Balanced

By: Prieur du Plessis | Thu, Mar 18, 2010
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As reported over the weekend (via US Global Investors), the latest Chinese inflation figures surpassed the one-year deposit rate of 2.25%. Negative real interest rates may provide an additional incentive to drive asset prices higher, increasing the likelihood of the Chinese central bank raising interest rates from a five-year low.

Rapid return of inflation in China may signal future tightening
Source: US Global Investors - Investor Alert, March 12, 2010.

Fears of further monetary tightening in China have recently been weighing on the Chinese stock market. Of all the bourses, the Shanghai Composite Index (3,046 at the time of writing) is the only one trading below its 200-day moving average (3,059), albeit after yesterday's good performance by only 13 points. Clawing back to above this key line and also breaking its high of March 4 (3,097) would be bullish signs. However, the February low of 2,935 must hold in order for the cyclical bull market to remain intact.

Shanghai Stock Exchange Composite Index
Source: StockCharts.com

The Chinese stock market was the first to turn the corner after the credit crisis sell-off - a full five months before the majority of indices bottomed in March 2009 - and is being watched closely to ascertain whether this market would be the first to spell danger for global stocks, i.e. the proverbial canary in the coalmine.

No reason to be overly concerned yet, argues David Fuller (Fullermoney) from across the pond: "People fear China's credit tightening might trigger another significant sell-off in world markets. China's monetary policy authorities need to get the balance right if they are to stem property speculation without overkill. This can be a fine balance but they have every incentive to succeed and their gradualist (baby-steps) approach to monetary policy tightening seems prudent. They will make some mistakes, like everyone else, but this is a medium-term risk and should have little effect on China's long-term potential."

He added: "Meanwhile, global stock markets have recently shown more evidence of a melt-up than a meltdown. Investors are climbing the 'wall of worry'. I will worry more when they sound euphoric."

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Prieur du Plessis

Author: Prieur du Plessis

Dr Prieur du Plessis
investmentpostcards.com

Dr Prieur du Plessis

With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.

He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).

Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.

Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.

Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.

In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).

Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.

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