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Chinese Stock Market: Miracle Or Bubble Trouble?
By: Dr Chan Yan Chong
Articles (200) Profile

There is a saying that has been floating around the Hong Kong stock market for many years “Poor in May, despair in June, revive in July”. This is much akin to the adage “sell in May and go away”.

May is now over, and we are already halfway through June. The Hang Seng Index (HSI) and the Straits Times Index (STI) have both since corrected downwards from their respective highs in April. However, speculators remain active in the markets.

During this period, some Singaporean investors have also turned their attention to the “miracle” stocks in Hong Kong.

“Miracle” Stocks?

Beginning April 2015, the Hong Kong stock market has been experiencing an epic run, as the HSI rose 3,000 points over two months. However, the amount of appreciation on the HSI is considered small when compared with some of the miracle stocks.

These miracle stocks are not limited to penny stocks, small-cap stocks or shell stocks, as some of the mid- and large-cap shares had also witness their prices shoot through the roof. The market values of a number of mid-cap shares have even surpassed that of many blue chips, after seeing multiple-fold increases in their share prices.

That is truly remarkable, and I could not understand who would have this ability to cause shares that are already worth hundreds of billions of Hong Kong dollars to continue to skyrocket.

Naturally, the meteoric rise of the vast majority of these stocks is not substantiated by real business performances; they are propped up solely by wanton speculation.

When prices start to rise, greedy investors will be attracted to chase after the artificially rising prices, and may even attract some small- and medium-sized fund managers to join in the fray.

Be Extremely Cautious Now

In reality, these fund managers may be inclined to take dangerous bets with a possibility of high returns, which translates to the chance for a bigger payout. Even when these bets go Southwards, the money loss is not theirs.

In May, several of these miracle stocks saw their prices plunged spectacularly. Even so, the fall of one is quickly replaced by the rise of another. Although several shares have seen their bubbles burst, investors’ enthusiastic pursuit continues unabated, and miracle stocks remain hotly sought after.

We are today witnessing how the Hong Kong stock market is being transformed, inevitably, to resemble that of China’s A-shares market, in the way bets are made recklessly and stakes are as high as any casinos.

Speculating on miracle stocks is very risky. Not only could these shares shed 40 percent of its value in one day, they could even be suspended from trading, sometimes indefinitely.

Placing all your bets on one shot in the current frenzy will likely cause you more heartache than it is worth, so investors are advised to exercise prudence and limit their investments in such speculative stocks.

With the Chinese government pushing out an endless stream of good news for the stock market, propping up share prices in the process, a large number of initial public offerings (IPOs) have debuted at this juncture.

At the same time, many listed companies, including state-owned enterprises, also took the opportunity to conduct shares allotment and rights issue to raise funds. However, with every IPO, especially large-cap counters, a large amount of funds is also drained away from the market.

Singapore Will Benefit From AIIB

As one of the founding nations of the Asia Infrastructure Investment Bank (AIIB), Singapore stands to benefit in the future.

As a small country with limited resources, Singapore’s contribution to the AIIB is not in providing funds to compete with other countries for influence, but in the provision of human resources and expertise.

Japan should have been the financial powerhouse in Asia, but it has chosen not to participate in this venture because of US opposition. Although Hong Kong is Asia’s financial centre, it is not an independent country, and its eligibility is still questionable. Even if it could join the AIIB, it will have to take a lower profile.

Therefore, Singapore stands a high chance to benefit from the setting up of this regional bank, and investors can consider buying in shares of Singaporean banks. Listed companies with large-scale infrastructure building capabilities should also be on your watch list.

Dividend Stocks Still Attractive

As many investors are predicting that the US Federal Reserve will raise interest rates in September this year, investors should look out for any forewarning given by the Fed.

Over the past month, the stock and bond markets are already preparing for the outcome of the Fed meeting in June. The Dow Jones Industrial Average has fallen below 18,000 points, and loan interest rates are already adjusted upwards.

The prices of dividend stocks will also be affected. However, dividend stocks are still different from bonds. Assuming a fixed-rate bond, the coupon yield of the bond will not change. However, dividend payouts are not fixed, so attention has to be paid to the earnings growth potential of such stocks.

Rental earning stock is one type of dividend stock. Such stocks are further divided into traditional real estate stocks that are in the rental business, and real estate investment trusts (REITs).

Of course, very few traditional real estate stocks are pure rental companies. Usually, property developers will supplement their earnings from selling apartments with a certain amount of rental income. These traditional property counters will not issue high dividends as they need to keep a certain amount of cash for new projects.

Investors looking for substantial dividend returns will choose to buy REITs. Usually, REITs will distribute almost all of their profits to unit holders. To finance new projects, they often raise funds from the stock market through share allotment and rights issue.

If there are no new development projects, the only way to increase revenues is to raise rents, but the ability to do so generally depends on the conditions in the various markets.

A-shares Will Join MSCI After Policy Liberalisation

Not long ago, some people believed the rise in China A-shares was timed to celebrate the rumoured inclusion of China A-shares in the MSCI Emerging Market Index. The currently popular index will then become a popular exchange-traded fund (ETF).

However, before A-shares can be included in the index, China must first resolve the issue of its shares trading quota so that it will not restrict the growth of the ETFs based on MSCI index. So, technically, it is impossible for MSCI to include China A-shares into the index.

The rumour of A-shares being included in the MSCI is merely a tool used to negotiate with the Chinese government to induce China to relax its trade restrictions on the A-shares.

However, with the wild rise in Chinese A-shares, the Chinese government is currently preoccupied with reining in this runaway bull and is not interested in relaxing control of the A-shares.

Dr Chan Yan Chong is a renowned investment expert with many accolades under his belt.

Please click here for more information about this author.

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