26 JULY 2013
Dr Chan Yan Chong’s Column
By Dr Chan Yan Chong
The minutes from the most recent FOMC meeting turned out to be a major positive for the stock market as the committee members have yet to decide on when to withdraw from the stimulus measures. Without a consensus, it simply means that the date has been pushed back indefinitely.
Owing to the solid performance by the US market, stock indices in Hong Kong and Singapore also performed admirably despite earlier hits caused by the falling A shares especially with the Shanghai Composite Index (SSE) trading below 2,000 points. Now that both bourses have shaken off the downward pressure exerted by the SSE, it is not hard to see both the Hang Seng Index and the Straits Times Index creating fresh highs this year.
Most stock markets have doubled since the lows of the 2008 financial crisis hence it is no longer that easy to spot bargain buys. There are, however, still stocks that are trading below the long-term price earnings ratio as well as the price-to-book. While stocks are not exactly cheap, they are also not incredibly expensive.
Chinese Premier Li Keqiang said that while China will continue to impose tighter controls it must also ensure that the measures do not hurt long-term growth as well as to make sure that growth and employment rate does not fall below a level that is deemed unacceptable. However, what is deemed as unacceptable?
The credit crunch has a floor and so does the tightening measures. While central bank governor Zhou Xiaochuan has been “setting fire everywhere,” he has also been telling everyone that “he has the firefighting measures in place”. Premier Li’s remarks caused the markets to react positively just like 2007 when China allowed funds to flow into the Hong Kong markets.
Premier Li said that the acceptable level for economic growth is 7.5 percent while highlighting that the long-term growth rate must be maintained at 7 percent. From 7.5 percent to 7 percent, it clearly demonstrates the resolve of the Chinese leaders in restructuring the economy. Finance Minister Lou Jiwei said during an official visit to the US citing “6.5 percent or even 7 percent growth will not be a problem”. This statement sparked off worries of a possible downgrade in growth forecast by the Chinese government.
I believe that a 7 percent growth rate is already very credible as the post-Deng era is marked by a period of rapid industrialisation and urbanisation. At current growth rate, it is very difficult to maintain growth at such a blistering pace whereby bubble can easily burst.
All it took was for Premier Li’s words to stabilise the markets while the central bank has yet to do anything. I am still optimistic that things can only get better once the already-battered retail investors are forced out of the stock market by fear-mongering research reports. There is likely to be more upside in the stock market so there is no harm jumping onto the bandwagon now. As long as the economic growth does not fall below 7 percent, the restructuring will continue for the long-term good; the government will do something once growth rate falls below 7 percent.
The PBOC announced the liberalisation of the interest rate of 20 July – a move that was rumoured sometime ago. This is a major move that will open up competition whereby the bigger banks may be able to offer lower deposit rates while the smaller banks offer higher rates.
In the past, rates were set by the government and borrowers had a hard time getting funds because banks lent only to the bigger state-owned companies. Only those who were well connected were able to get preferential rate who in turn farmed out loans at higher interest rate to smaller borrowers who needed money. With the new move, banks can lend out to smaller companies at higher rates but still way below what the shadow banks are charging. It is hoped that the new move can allow for a level playing field and give small-and-medium enterprises more room for growth.
This is good news for the banks who are now able to set their own rates, which means that interest margin will increase for these banks. This also augurs well for the private developers as they are now able to borrow from banks instead of having to resort to issuing bonds at a much higher rate and face foreign exchange risks since bonds are usually issued in US dollar.
Internet-related stocks have been making fresh highs mainly due to the Alibaba effect. Ma Yun is an astute businessman by floating Alibaba at 100 times Price-earnings ratio and then saw the price double after its initial public offering! Now that Alibaba is once again seeking listing, internet stocks are all surging. Hence, if you had missed the opportunity, buy internet stocks should there be a correction. Look out for Alibaba’s partner Fosun Int’l (HK: 656).