The euphoria that has seen the Chinese A-shares market drive stock markets and trading volumes to new highs is clear evidence of a bubble emerging.
That is the view of King Lee Fuei, Citywire A-rated manager and head of Asian equity at Schroders.
Speaking at a roundtable event in London, Lee said the opening of the Shanghai-Hong Kong Connect, known as the ‘through train’, is a pipedream without real long-term benefit.
‘Yes, we have seen the index rise by more than 60% and trading volumes are over one trillion renminbi but it comes down to the people in the market – these are not long-term traders,’ he said.
‘They just want to make money while they can and the excitement is there, as well as, importantly for them, making it quickly. We are seeing IPOs being hugely oversubscribed and we are seeing more and more people who, quite frankly, shouldn’t be buying stocks getting involved.’
Lee pointed to the example of an increase among monks opening trading accounts specifically to target the A-shares market. ‘We have to ask ourselves are monks qualified to be picking stocks? Without being unfair, I would say no, probably not.’
Lee likened the market reaction to that seen in 2007 when mainland Chinese investors were allowed to buy into the H-shares market. Investment rocketed and resulted in hugely overvalued state-owned companies in the Chinese market.
‘Last time around, in 2007, the police genuinely had banners which said: “Don’t rob people, invest in the stock market”. That was how much of an easy ticket it was. If that wasn’t a clear sign of a bubble I don’t know what is and we are seeing echoes of that now,’ he said.
Keep clear of Korea
Lee, who runs five funds covering Asian and Pacific equities, said he is avoiding the A-shares market but also steering clear of Korea in the wake of changes to tax regulation in the country.
New rules indicated that companies with paid-in capital of 50 billion won have to pay an additional 10% tax on net profits after payments for investment, salaries and dividends. Lee said this move was designed to encourage greater dividend pay outs but this has not worked.
‘A lot of people got excited because they expected increased dividends but companies, such as Hyundai, decided instead to buy up prime real estate in central Seoul for $10 billion. For what purpose? To build a theme park based on Hyundai because they wouldn’t then get taxed on it.
‘They are more interested in empire building than returning money to shareholders, so there is no incentive to invest. Korean stocks are overloved and overvalued and the fact they are really well-regarded by everyone is not a good thing necessarily.’
Lee’s largest fund, the $2.43 billion Schroder ISF Asian Equity Yield fund, returned 37.3% in US dollar terms over the three years to the end of December 2014. This is while its benchmark, the MSCI AC Asia Pacific ex Japan TR USD, rose 31% over the same time frame.