Templeton’s Mark Mobius has touted the Chinese growth story for years.
So how does he explain the nearly 50 per cent decline in the Shanghai index from peak in 2008?
Mobius says the yuan-listed Shanghai market is generally closed to foreigners, creating a a liquidity crunch and volatility. If you were smart like him, you’d invest in “red-chip” stocks on the Hong Kong market.
From his blog:
I have heard queries from baffled investors about past underperformance of the Chinese stock market despite the long-term positive outlook for China. One key factor that I would like to stress is that, as equity investors, we look at individual stocks rather than the market as a whole. There is quite a difference between what’s happening in the domestic Chinese A share market and the H share market in Hong Kong, which is where we are buying and hold stocks.
The A share market is generally closed to foreign investors, the renminbi is not convertible in this market and the capital cost structure and a systematic shortage of equity supplies; all contribute to higher volatility. In addition, the underperformance of the broader Chinese A share market last year was a result of the influx of initial public offerings, which made a strong comeback on the mainland, soaking up a significant amount of liquidity from listed stocks to higher-valued new companies.
We continue to focus on the H shares and the so-called “red-chips” listed in Hong Kong, which is where we finding the most interesting opportunities. Most importantly, markets go through cycles, and investments, and the Chinese market are no exception. This underscores the importance of patience and our view that any serious investor should have at least a five year investment horizon.