Practical analysis for investment professionals
29 May 2015

Weekend Reads for Global Investors: What Drove Chinese Stocks Up 128% Last Year?

Posted In: Weekend Reads

By now you might have seen the sensational headlines from all major financial news outlets: The Chinese stock market has finally crashed! On Thursday, in a matter of hours, investors watched as the CSI 300 Index (SHSZ300) dropped by close to 7%. In comparison, the S&P 500 (SPX) has gone up only by about 3% this year.

The Chinese stock market has witnessed a wild ride over the past year. Despite the one-day crash, the CSI 300 Index has returned 128% over the past year, as of this writing. The Economist called the Chinese market “a crazy casino” this week. At a recent gathering of the Hong Kong Society of Financial Analysts (HKSFA) to which I was invited to discuss Warren Buffett’s investment wisdom, few in the audience could find fundamental justifications for the meteoric rise.

It seems challenging indeed. The Chinese economy is slowing and the companies are facing the strong headwinds of weakening demand and rising labor costs. If you look deeper, however, there is actually scant evidence to support the belief that the stock market cannot go up when the economy is in poor shape. We know both fiscal and monetary policies have been very friendly to the stock market over this period.

More importantly, there have been a number of institutional changes that have either taken place in recent months or are expected to take place soon. We’ll reserve more focused discussions on these institutional changes for another day, but here’s a brief list:

  • The Shanghai-Hong Kong Stock Connect: The exchanges in Shanghai and Hong Kong received approval from the regulators to offer a selection of their listings on the other exchange. This opened up an additional channel for international investors to invest in China, in addition to the QFII and RQFII schemes.
  • Mutual recognition of funds: Just a week ago, the securities regulators in China and Hong Kong agreed in principle to allow mutual funds registered in the other jurisdiction to distribute their products in their jurisdiction. Paul Smith, CFA, opened on this latest development this week.
  • Inclusion of China A shares in major indices: MSCI has kept everyone guessing when it will include domestically traded Chinese stocks, called A-shares, into its popular MSCI Emerging Market Index. FTSE made a clever business move and announced this week two transitional indices that will include limited Chinese A- shares initially, with gradual increases over time. As there are no assets tied to these new indices, the market impact is more symbolic than real. Still, this puts pressure on other index providers. Passive products tied to the MSCI Emerging Market Index has a tremendous asset base. The iShares MSCI Emerging Market ETF (EEM) alone has more than US $32 billion invested in it.

At the HKSFA gathering, the question arose whether value investing works in China. Buffett thinks so. I have no doubt that over the long haul he will be proven right. In the meantime, whether the CSI 300 will see 1,000 or 10,000 first is anyone’s guess.

Larry Cao, CFA, discusses Warren Buffett's skills as an investor at the Hong Kong Society of Financial Analysts (HKSFA).

Larry Cao, CFA, discusses Warren Buffett’s skills as an investor at the Hong Kong Society of Financial Analysts (HKSFA).

Below is a full list of links from the paragraphs above and some of the other interesting reads I have come across in recent weeks. Happy reading and enjoy the weekend.



Emerging Markets

The Soft Side of Business

And Now for Some Readings Truly for the Weekend . . .

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Larry Cao, CFA

Larry Cao, CFA, senior director of industry research, CFA Institute, conducts original research with a focus on the investment industry trends and investment expertise. His current research interests include multi-asset strategies and FinTech (including AI, big data, and blockchain). He has led the development of such popular publications as FinTech 2017: China, Asia and Beyond, FinTech 2018: The Asia Pacific Edition, Multi-Asset Strategies: The Future of Investment Management and AI Pioneers in Investment management. He is also a frequent speaker at industry conferences on these topics. During his time in Boston pursuing graduate studies at Harvard and as a visiting scholar at MIT, he also co-authored a research paper with Nobel laureate Franco Modigliani that was published in the Journal of Economic Literature by American Economic Association. Larry has more than 20 years of experience in the investment industry. Prior to joining CFA Institute, Larry worked at HSBC as senior manager for the Asia Pacific region. He started his career at the People’s Bank of China as a USD fixed-income portfolio manager. He also worked for US asset managers Munder Capital Management, managing US and international equity portfolios, and Morningstar/Ibbotson Associates, managing multi-asset investment programs for a global financial institution clientele. Larry has been interviewed by a wide range of business media, such as Bloomberg, CNN, the Financial Times, South China Morning Post and the Wall Street Journal.

1 thought on “Weekend Reads for Global Investors: What Drove Chinese Stocks Up 128% Last Year?”

  1. Benjamin Graham – also known as The Dean of Wall Street and The Father of Value Investing – was a scholar and financial analyst who mentored legendary investors such as Warren Buffett, William J. Ruane, Irving Kahn and Walter J. Schloss.

    Warren Buffett once gave a speech at Columbia Business School explaining how Graham’s record of creating exceptional investors (such as Buffett himself) is unquestionable, and how Graham’s principles are everlasting. The speech is now known as “The Superinvestors of Graham-and-Doddsville”.

    Buffett describes Graham’s book – The Intelligent Investor – as “by far the best book about investing ever written” (in its preface).

    Graham’s first recommended strategy – for casual investors – was to invest in Index stocks.
    For more serious investors, Graham recommended three different categories of stocks – Defensive, Enterprising and NCAV – and 17 qualitative and quantitative rules for identifying them.
    For advanced investors, Graham described various special situations or “workouts”.

    The first requires almost no analysis, and is easily accomplished today with a good S&P500 Index fund.
    The last requires more than the average level of ability and experience. Such stocks are also not amenable to impartial algorithmic analysis, and require a case-specific approach.

    But Defensive, Enterprising and NCAV stocks can be reliably detected by today’s data-mining software, and offer a great avenue for accurate automated analysis and profitable investment.

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