Wednesday 3 June 2015

The graph that shows Chinese shares are in a bubble


The Shanghai market has more than doubled in a year, while another crucial measure suggests investor demand is unsustainable


A lot of attention has been focused on the Chinese stock market recently following its spectacular rise. The SSE Composite, the main index for the Shanghai exchange, has risen by about 140pc in the past year.
This has, naturally enough, given rise to fears of a bubble, although not all commentators are convinced. Using the popular "price to earnings" or p/e measure of value, the market is trading at about 20 times earnings, well below its previous high in 2007 of around 40 times. For comparison, the London market currently trades at about 15.5 times earnings.
But one graph (below) has convinced investors at Monogram, a London-based fund manager, that the market is indeed in a bubble.
It plots the combined value of all the share trades placed in Shanghai each day and shows that the figure has risen hugely since 1997 but at a much greater pace over the past year or so. A yuan is worth about 10p, so shares worth about £83bn are currently being traded every day.
“If this is not a bubble then it’s hard to imagine what one looks like," said Paul Marson, Monogram's chief investment officer. "The average daily stock market turnover has increased 10-fold in the past year to 830bn yuan from 80bn."
He said the root cause was an increase in lending by China's banks, allied with increased appetite for shares as the Chinese property loses its appeal.
"An enormous amount of liquidity has gone from inflating the property market, which is now deflating, to inflating stock prices,” Mr Marson said.
He added: “This is a very unhealthy sign for the global economy. It can only end in tears. Bubbles always leave behind more problems than they resolved.”

27 May 2015
http://www.telegraph.co.uk/finance/personalfinance/investing/shares/11630704/The-graph-that-shows-Chinese-shares-are-in-a-bubble.html

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