Amidst the precipitous crash of China’s stock market, there were concerns among investors, including Russian ones, about the wisdom of investing in China. Given the Kremlin's pivot to China, should it be concerned?
An investor leans against a pillar as a display shows stock information at a brokerage house in Beijing, China, July 15, 2015. Photo: AP
In the wake of the June crash that wiped out over $3 trillion from China’s stock markets, investors remain cautious about the economic behemoth’s recent rebound.
A fifteen percent gain spawned by the unprecedented support of the Chinese government has done little to assuage investors’ fears and caused analysts to equate the recovery to a “dead cat bounce.”
The biggest question now is whether the upward trend from heavy market manipulation will hold – or is it merely the calm before another storm?
Now that the dust has settled following five weeks of drama, some analysts say that the worst is over, thanks to state-backed funds that will stay as long as investor confidence remains fragile.
“I think the market has bottomed out, and a slow bull is emerging,” Tang Yonggang, an analyst at Shenwan Hongyuan Securities, told The Wall Street Journal.
That view is also held by Christian Deseglise, co-director of BRICLab at Columbia University’s Center on Global Economic Governance, who said the Chinese market appears to have stabilized and this trend will likely continue, allowing the market to move up in a smoother manner.
“Valuation of blue chip (stocks) are not particularly stretched,” he told Russia Direct. “I believe it will likely be more rational than it was in the first six months of 2015.”
On the other hand, some well-known money managers like Bill Ackman of Pershing Square Capital Management and Jeffrey Gundlach, co-founder of DoubleLine Capital, warned that China’s markets “lack transparency” and are “too volatile and murky to invest in” at a recent CNBC conference in New York.
Pointing out some debilitating problems in the Chinese financial system – shadow banking and leverage – Ackman is not alone in his concerns. In a recent report, the World Bank called for China to deleverage its economy and reform its financial sector.
“China has tempered the pace of total credit growth, but unless it adopts a systematic approach to strengthening financial sector discipline, the measures are inadequate to ease the misallocation of credit and the buildup of risk,” it said.
The introduction of China Securities Finance Corporation (CSF), a state-run margin trader, does not help in stemming insecurities posed by a debt-fueled market and concerns over excessive market intervention. With the ability to access over $480 billion in borrowed funds, the existence of CSF may reassure China’s domestic retail investors but this is not without risks.
Moral hazard poses a real threat and the Chinese government will have to bear the expensive cost of sustaining its stock market. While the Shanghai Composite Index made a quick recovery after its first stumble last week post-interference, opinions on the recovery remains polarized. Yet, the overall consensus within the investment community is that the Shanghai market should be avoided for now.
China plays an integral role amongst the BRICS, being the central connection between the other nations. At the recent BRICS Summit, Deseglise said there were concerns about spillover effects, but he feels that the market crash was more of a China-specific event.
Thankfully, China’s financial system is quite isolated from the country itself with its stern capital controls and foreign investment limitations thus far. This much-criticized measure of market protectionism has today, proved – to a certain extent – to be a saving grace of sorts for the international investment community.
Even though Russia and China’s strong economic relationship will only continue to grow in the future, it seems the former is unlikely to feel any whiplash from the recent crash.
“No, I don’t think there will be any impact on Russia,” said Deseglise
“I don’t think the impact of the crash will be major for the other BRICS,” he adds. “The Chinese authorities will likely be successful in stabilizing the market.”
Could Russia or South Africa become new investor darlings?
Now that foreign investor confidence in Asia’s largest and most dynamic stock market is waning, the hunt for safer pastures within emerging markets has led investors to two BRICS stock markets – Russia’s Moscow Stock Exchange (Micex) and South Africa’s Johannesburg Stock Exchange (JSE).
With China out of the race, things may be looking up for Russia. In a recent Bloomberg News article, the agency said its data shows that Russia will surpass China, as well as the other BRICS nations, in risk-adjusted returns for this year.
“Our models are telling us to buy Russia,” Tim Love, a London-based investment manager at GAM UK Ltd., told Bloomberg Business News. He added that there is a very strong turnaround potential for the Micex Composite Index, but current political uncertainties present difficulties in making this call.
Since the start of the year, the Micex Composite Index has increased by about 12 percent to date even with the ruble’s lackluster performance. This puts it ahead of the 4.9 percent and 1.5 percent gains made by Brazil’s Bovespa and India’s National Stock Exchange (NSE), respectively.
Unexpectedly, South Africa’s Johannesburg Stock Exchange has emerged as a dark horse, challenging Russia in its race to woo foreign investment. The JSE made broad gains of about 22 percent in the first half of this year despite the gloomy outlook for commodities, high unemployment and sluggish economic growth.
Business confidence in South Africa has soured lately, in light of recent power supply disruptions that severely impacted the country’s manufacturing and mining sectors.
Logically speaking, the upswing in the stock market does not match up to economic indicators – but what’s keeping the JSE buoyed is the overseas earnings of listed companies and international investors.
“South Africa stacks up really well… when compared to several other emerging markets like Russia or China,” said Gabriel Sacks, an investment manager for emerging market equities at Aberdeen Asset Management in a Wall Street Journal interview.
“Our view is that economic growth does not always translate into strong equity market returns and corporate profitability,” he added.