One of the major concerns surrounding the breakneck rally in Chinese stocks over the past year was the level of sophistication of new investors.
Remember this chart?
— Tom Orlik (@TomOrlik) April 1, 2015
Released earlier this month, it offered a fascinating insight into the level of sophistication of Chinese stock investors. It revealed the education of new investors, those that have helped propel mainland Chinese equities up 100% in less than a year, was substantially lower than those who had previously participated in the market.
According to the research 5.8% of all new investors couldn’t read. Over two thirds had an equivalent education level of junior high school or less. Warning lights were flashing everywhere.
If unsophisticated investors were piling in it was a sign that the markets were at a top or, even worse, about to suffer a significant correction.
While this still could eventuate – there have been countless examples in history of over exuberance leading to investor heartbreak – those fears, at least temporarily, have been reversed.
Now it’s the established investors, particularly in Hong Kong, that are joining in the rally. It’s simply impossible for these levels of buying to be attributable to retail investors from China.
Since the concerns first emerged about investor sophistication, Hong Kong’s Hang Seng has put on over 10%. Sure, retail investors may have started the rally, but now southbound flows into the Hang Seng only partially explain the move.
It’s anyone’s guess how long the rally will last, but if there is a sharp correction it’s not only the less sophisticated that will be left hurting.