The Lovers, The Dreamers And Me
Analysts at Citibank and The Economist are coming to Chinese equities’ defense: “The Shanghai index, which includes China’s biggest companies from banks to oil majors, is trading at a forward PE of about 15, in line with its ten-year average. From this perspective, the rally looks more like a ‘mean-reversion trade’ than something wildly unsustainable.” “When investors tell us that China is a bubble and expensive all we need to do is highlight…a market which is very certainly an investor favourite, India. This market is even more expensive relative to all the other markets, and it isn’t as if investor after investor we meet tells us, ‘oh boy that Indian market is hotter than your average Vindaloo.’” (Side note: valuations suggest that investors are expecting the highest EPS growth rates in India (6.5%), Poland (6.4%), South Africa (6.3%), Indonesia (6.2%) and the Philippines (6%)) “The most striking feature of the Chinese rally in recent weeks has been its crossing of borders…A programme to connect the mainland and Hong Kong stock markets has provided a corridor for channeling excess liquidity out of China. With A-shares still trading at a 20% premium to H-shares, Chen Li, a strategist at UBS bank, predicts the convergence will continue.” Meanwhile, “there has been speculation in certain quarters of the markets that a ‘Singapore-China’ stock connect may be in the pipeline.”
But Wasn’t Distortion Always The Point Of Extraordinary Monetary Policy?
“The European Central Bank has barely started its €1 trillion-plus asset purchase program and already there are mutterings about how it might need to be wound down early. There are signs of a solid pick-up in the eurozone economy,” as well as “rising bank lending as firms turn more bullish on their growth prospects.” Yet “on the other side of the equation there are clear market distortions.” For example: “all over Europe, banks are being compelled to rebuild computer programs, update legal documents and redo spreadsheets to account for negative rates…some banks have faced the paradox of paying interest to those who have borrowed money from them…In Spain, Bakinter has been forced to deduct some clients’ mortgage principal payments because an interest-rate benchmark tied to Switzerland’s currency has dipped into negative territory.” Meanwhile, Eurostat says the savings rate is moving back up, which may “send minor alarm bells ringing for those who fear that households may respond to falling consumer prices by postponing discretionary prices.” Then again, Ben Bernanke says higher wages in Germany are good news for everyone: “In a world that is short of aggregate demand, Germany’s trade surplus redirects spending away from other countries, reducing output and incomes abroad. Higher wages in Germany should promote spending by German households on both domestic goods and imports, reducing the imbalance.”
“One of the most important questions for economists about the past year’s collapse in oil prices is whether it was driven by supply or demand.” The IMF says “it started out as a bad-news demand story, but turned into the good-news supply story.” Meanwhile, “China is on an oil-buying spree again.” (alt)