A little perspective is needed

“ICBC, or the Industrial and Commercial Bank of China (another one you may have guessed) is actually up five percent in Shanghai over the last month. As one of the largest banks in the world the bank trades on crazy low fundamentals, it has a historic price to earnings multiple of less than 8 times, it has a yield of around 4.5 percent. And over the last year the share price is up 65 percent, it has certainly lagged the broader Chinese market.”


To market to market to buy a fat pig. Wow. That is crazy, another day of moves of the crazy proportion, this time in the direction of upwards and onwards. Chinese stocks moved sharply higher yesterday and have done so again today. Although they are still down 23.6 percent over the last month, that in itself is crazy. The most sensible number, all things considered is the 5 year 58 percent return, perhaps that reflects reality.

Who am I to know however, stock market does not equal economy and economy does not equal stock market. Companies in a listed environment are supposed to represent the cream, right? It helps you less when you see the current level of the Shanghai Stock Exchange, 3900 points and then see the 52 week low, 2033 points and the 52 week high just over a month ago, 5178 points. It all seems rather wild. Not helping matters are the government intervening, telling stock market participants what they can trade in. Being locked out certainly leads to uncertainty.

All I know is that I know very few listed businesses in China, on either the Shenzhen or Shanghai stock exchange. Before you look, write down 5 companies that you think might be listed in that environment and see whether you are right or not by checking on Google Finance. Some of the bigger ones have a main board listing in Hong Kong, companies like Lenova, China Mobile, China Telecom, China Construction Bank Corp. has a dual listing, both Hong Kong and Shanghai. The one year return is 87 percent, the five year return is 51 percent and the “since the financial crisis” return (October 2007) is minus 22.5 percent for shareholders of China Construction Bank Corp. So when making these on the fly comments about how the Chinese market have flown and fallen recently, always remember a little perspective is needed.

ICBC, or the Industrial and Commercial Bank of China (another one you may have guessed) is actually up five percent in Shanghai over the last month. As one of the largest banks in the world the bank trades on crazy low fundamentals, it has a historic price to earnings multiple of less than 8 times, it has a yield of around 4.5 percent. And over the last year the share price is up 65 percent, it has certainly lagged the broader Chinese market. If I gave you information separately (the share price move and the fundamentals) you would arrive at a different conclusion. Chinese capital markets are still far from mature, to think that in 1991 there was a choice of only 8 stocks, by the end of the following year it was only 29. By 2000 it had increased to 572, by the end of 2014, according to the Shanghai Stock Exchange, there are 1071 listed companies, 4535 listed securities. Check it out, I have circled a number you may find interesting, the average PE ratio, as per the official website:

Is 18.32 times too hot? No, I do not think so. I think the Chinese market went through a massive rerating and that has scared loads of people. Ed Yardeni has his forward earnings projection on the S&P 500 at 126.5 Dollars, which means that the large cap S&P 500 index trades at 16.4 times. Not too far away from the Chinese market. So which market, if any is too hot? Neither I guess. The faster growing companies will always have higher multiples and in the case of the bigger businesses, like Apple or the Industrial and Commercial Bank of China, will trade at a discount to the rest of the market. That is just the way that it goes I suspect. Anyhow, a bit of perspective is always needed.

Locally the market soared yesterday, stocks as a collective were up a whopping 2.4 percent, industrials led the charge. And the big ones at that, Naspers followed the Tencent performance in Hong Kong with a 7.37 percent move higher. That is clearly take-off mode. Discovery also had a huge day, up over four and a half percent to get back to levels of May this year, post those sparkling results. We can only be patient, not try and time the market and stay long the quality.

That is our job, often it is also to act as a shock absorber, ordinary retail investors (any investor for that matter) are looking for home comforts like hot water bottles, hot chocolate and a warm comfy blanket, we all need to be told that things are going to be OK. Which explains why after you have seen the doctor, you feel better immediately. I can remember the dark days of ’07 and ’08 telling people to stay the course, companies themselves were not seeing too much from a business point of view, you knew however that you were not doing anyone a favour by selling shares near the bottom.


The other big “issue” that is bugging markets and continues to hang around like a bad smell is obviously the Greek negotiations with their 18 European partners in what is an experiment that cannot and I feel will not fail. It is awesome to move seamlessly around Europe and use the same currency. My observations on different payment systems yesterday I think deserve some interrogation, at the bottom of the office friends of friends currently in Greece tell me that businesses are not accepting cards at all, cash only. Scared of taking deposit haircuts I guess. What about those savings wallets, what about M-Pesa or a PayPaul Wallet? Surely those are outside of the banking systems? The truth is that Greek banking systems are currently on the edge.

The negotiations are coming to a head, all the while the FT reports that Tsipras submits new plan to bailout monitors, that now needs to be vetted. Forget the mens “championship” finals on Sunday evening, this is the real deal. There is nothing that you or I can do about this now, this falls into that category that we call “out of our control” and although a little bigger than a storm in a tea cup, it really has captured the imagination. Imagine if we were as obsessed about the 4 million displaced Syrians as a result of their civil war. I suppose that in fairness to all concerned, the one seems solvable (Greece debt) the other (Syrian conflict) does not.

Those of you thinking that there is a drachma or some other parallel currency wanted by the Greeks, no sir, here is the letter obtained by the FT and published on their website, Tsipras says the following:

With this proposal, the Greek people and the Greek government, confirm their commitment to, fulfilling reforms that will ensure Greece remains a member of the Eurozone, and ending the economic crisis. The Greek government is committed to fully implementing this reform agenda- starting with immediate actions – as well as to engaging constructively on the basis of this agenda, in the negotiations for the ESM Loan.

Does that sound like a person that wants to destabilise the single trade and commodity zone? No, that sounds like someone who is ready to concede and make sure that his country enjoys the benefits of being in, even if there are hardships still to be experienced. The Greek parliament is going to vote today, what was the point of the referendum then? And more importantly, what happens if they say no?


Linkfest, lap it up

Here is another sphere that technology is making things cheaper. The iPhone camera and apps have reached a level where you can film a movie using your Apple devices – Here’s how a filmmaker shot his critically-acclaimed movie using just an iPhone. Could this be considered an unintended consequence?

Corrections, big/ small are useful to some and scary to others. It all depends on your time frames and past experiences – Who Would Benefit From a Stock Market Correction?. “It’s a shame that people associate down markets with calamity and heartache, as opposed to opportunity and good fortune.”

I found this Tweet very interesting, it also gives perspective on where you would want to live and where business has huge potential.

Here is a link to a bigger image – 5% of global population


Home again, home again, jiggety-jog. Green! Green everywhere! Our market is up 0.8% in the first 30 minutes of trading and will probably go higher as European stocks are up between 1% and 2%. The Cac40 is up even higher at 2.45%. The Rand is also catching a bid, going from R/$ 12.50 yesterday to under R/$ 12.39 as I currently write this. It would seem that we have moved from “risk off” to “risk on”, highlighting the short term emotional swings that a market goes through. As Benjamin Graham said “since in the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine”. Stay calm and invest in fundamentals with long term views.


Sent to you by the Vestacters, Sasha, Michael, Byron and Paul.

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