Chart: Shanghai Composite is making a new low30 July, 2012, 19:22. Posted by Zarathustra
Shanghai composite index is making a new record low today. The last time we saw the index this low was in early 2009 as the global economy started to recover from the financial crisis.
As we have mentioned for more than a few times, that Chinese stocks were in a bubble back in 2007, and it is not uncommon for an asset class to take more than a decade to get anywhere back to the bubble top. This is exactly what is happening for Chinese stocks, as it is nowhere near the top at 6,000+ points.
The consensus of a Q2 bottom for growth and H2 recovery, in our view, is built on hope for stimulus from the government. In many ways, of course, this hope is not unjustified. We have been hearing a lot of talks regarding stimulus to support growth, and increasingly we think the local governments are taking the baton in terms of planning investment projects to stimulate growth.
However, stock market isn’t very much impressed by all these talks about the stimulus. The chart below shows the Shanghai Composite alongside with S&P 500. As we jokingly noted, Chinese stocks have turned quite European of late, underperforming the US, particularly since 2010. And as Shanghai now looks to be leading US stocks in terms of turning point, this is probably the most interest chart to watch.
Of course, there are reasons to be not impressed by all these stimulus talks, as we have discussed earlier.