Despite uncertainty, markets are not a lottery

Two major “typhoons” of different nature struck Hong Kong last week. The first one was meteorological disaster that forced the island to close its offices, whereas the second was purely financial, when the Hang Seng Index touched 17,592 points. The daily loss was marginal – only 2.3% – but the coincidental loss of the quarter was the worst over a decade. The Mainland showed no difference: the Shanghai Composite Index closed the week (and the month) at 2,359 points. The step back was even smaller than Hong Kong (a mere 0.3%) but notwithstanding it marked the lowest score since 2½ years. The loss during the 3rd quarter was 14.6%. True, the National Holiday in China played a role. It is a tradition to sell before October 1st to raise money. Still, there are many other reasons behind the selling spree. They all converge toward pessimism. The Chinese economy is expected to sink in a quagmire of troubles, resulting in a more probable hard landing over a soft one. The industrial output is slowing down, while the real estate is facing an unexpected liquidity crunch. The government is so concerned about a possible bubble burst and the inflation that Beijing tries hard to rein the surge of prices by increasing the RRR (Reserve Requirements Ratio) for the banks, but that comes to a price: falling of values of stocks. Companies and institutions – firmly believers in a limitless growth of China – in need of money are countless. Selling assets is a tool, sometimes taken further than expected. The fall of value hitting the export-related stocks is uncommon, while that of gambling sector is peculiar. It’s rumored that Beijing could impose some restrictions on visa issuing to citizens willing to try their luck in Macau that was detrimental to the stocks. The frequency of short has reached to the point that it’s not likely to be further accelerated. Investors might be forced to cover themselves and to buy, giving place to a spiral of higher prices. Thus, a short squeeze is very predictable.
The reality is that uncertainty lingers over everything. Global problems are too big to be solved soon. Chinese growth, European debt, American unemployment and value of currencies are all inextricably connected. At the same time, they have different effects on the macro-economic issues. Nobody can control everything. If trust is essential to grow, fear causes the opposite result. Even gold is losing value. In a sort of conditioned reflex, investors find a shelter on traditionally safe items like the US dollar and the crude oil. These are temporary outcomes, a mirror of an unpredictable future. The Chinese Stock Exchanges follow the crowd, until when new assets will merge and the situation will go back to normality. Then some rational criteria prevail. This is what Beijing wishes: that in the long run national growth will have beneficial consequences on the stock indexes. By then, it should be clear what China suffers today are typical pains, taking place when one grows too much and too quickly.

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