July 7, 2015
[Editor’s note: Tim Price, London-based wealth manager and frequent Sovereign Man contributor, is filling in for Simon today.]
History, wrote John W. Campbell Jr., doesn’t always repeat itself. Sometimes it just screams, “Why don’t you listen to me?” and lets fly with a big stick.
The definitive new millennium bubble, namely the NASDAQ Composite Index, peaked on the 10th of March 2000, at a level of 5,132.
Within two years that same index would be trading at just above 1,000. $5 trillion in market value ended up going to money heaven.
History’s big stick is flying again.
The Shanghai Composite Index peaked on the 12th of June, at the rather eerily similar level of 5,166.
As things stand it has lost a quarter of its value and over $2 trillion in the space of two weeks.
The Wall Street Journal reports that the 10 worst performing China funds of the past month are ‘structured’ funds – i.e. they’re leveraged index trackers.
The three worst performers, all run by fund managers with less than a year’s experience, fell by an average of 77% during the month.
This being China, bull markets aren’t allowed to die without a fight, and the authorities are pulling out all the stops.
The People’s Bank of China has already cut interest rates and eased reserve requirements.
The China Securities Regulatory Commission has relaxed collateral rules on margin loans.
Not to be outdone, the Asset Management Association of China has issued a rather Confucian statement titled ‘Beautiful sunlight always comes after the rain’.
There are many ways of losing money in the markets, but the belief by retail investors that the authorities will always look after retail investors is probably the most certain.
And retail investors account for between 80% and 90% of trading in Chinese stocks. (The month of May saw more than 14 million trading accounts opened.)
A large constituency of neophyte investors is now in the process of appreciating that financial markets can go in a direction other than up.
And there are, fundamentally, only two real ways of making money in the markets, and they are mutually exclusive.
One is to follow price momentum. This is typically a shorter term trading strategy, or what one might refer to technically as speculation.
The other is to buy high quality assets at less than their inherent worth.
This is a longer term approach which one might refer to technically as value investing.
The Chinese stock markets are a gigantic playground for momentum traders, but are something of a desert for value investors.
Two markets that look especially attractive to us are Japan and Vietnam.
Almost half of the Japanese stock market trades on a price/book ratio of less than 1. (Only 15% of the US stock market trades at a comparable multiple.)
Vietnam, separately, looks set to benefit from the removal of limits on the foreign ownership of listed businesses.
As UBS point out, Vietnam’s market cap-to-GDP ratio is the lowest in Asia, at only 30%. Having been the worst performing market in Asia for the last five years, Vietnam has the potential to be one of the best over the next five years.
If jitters in Chinese markets happen to make other Asian investments cheaper in the short run, that clearly makes these markets even more compelling.
Tim Price is a principal at London-based Price Value Partners, a new global value equity fund, which invests precisely on the basis that Tim describes above. He is also the editor of Price Value International.