Greatest Mania Ever - Arriving Now
By Dr. Steve Sjuggerud
May 22, 2007
China could be about to see the greatest investment mania in the history of man… and I say that with no irony or sarcasm.
Yesterday, I met the most widely read investment writer in Hong Kong, and surprisingly, he agreed with me…
Jake van der Kamp helped to create Morgan Stanley's research department here in Hong Kong back in the 1980s (if I got the story right). Today, he sets up shop at a table in the bar at the Foreign Correspondents' Club, which is where we met. Here, he writes a column for the newspaper, the South China Morning Post. Impressively, Jake types away with a cup of coffee in one hand and a toothpick (in place of a cigarette) in the other.
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Jake says, "Beware Shanghai."
He compares the current stock market insanity going on in Shanghai right now to that in Taiwan 20 years ago. Talk about irrational exuberance… at that bubble's peak, the top banks in Taiwan had a market value greater than the entire U.S. banking system.
Today, some 300,000 people a day open brokerage accounts in China. One 24-year-old woman quoted in today's South China Morning Post offers a perfect example of the frenzy and expectations. She cuts her lunch break short to trade, saying: "I bought some B shares on Tuesday and two days later they had risen about 15 percent… That's amazing, as A shares I bought three weeks ago only earned me about 20 percent of profit."
It has to end badly. There's hardly any way around it.
Asia's richest man and shrewdest investor commented on the situation last week. Li Ka-shing said: "As a Chinese, I am worried about the mainland stock market. History shows that any phenomenon whereby shares are priced at 50 to 60 times forward earnings will end in a disaster. And any economic fluctuation in the mainland will absolutely hit Hong Kong." He further warned: "In a sharply volatile stock market, small investors will be the victims in the end."
Despite the warnings of Li Ka-shing and the government's efforts to cool the market craze, the Shanghai index rose more than 1% on Monday.
So far, the mania has been mostly confined to the local stock markets, which are basically just for local Chinese investors. But the Chinese government is looking for a valve to let off some of the speculative steam. So it's making it easier for mainland investors to buy into Hong Kong stocks, for example.
Excitable Chinese traders are taking the bait. Hong Kong stocks are at record highs. I expect they'll likely continue to rise – quite possibly to never-before-seen valuations – on the backs of mainland Chinese investors. There's a simple reason that Hong Kong stocks should keep soaring... Many companies list in both Shanghai and Hong Kong. Until recently, most Chinese investors could only buy in Shanghai, so those shares are much more expensive compared with the identical shares in Hong Kong.
When could it end? We can't know…
Jake van der Kamp says the driving forces in Shanghai are "an exact match" to Taiwan back in the '80s. The ultimate outcome was horrendous. He says stock prices in Taiwan today are "barely half" of what they were 17 years ago (in U.S. dollar terms).
However, Jake said that if we stick to the Taiwan example, Shanghai shares could rise another fourfold…
It's not impossible. The Chinese don't have many places to put their money. And this is their first experience with stocks, so most novice investors believe there is no limit to how high things can go.
In short, we have the setup conditions for what could be one of the greatest investment manias ever witnessed – if not the greatest.
If you're bold, and you have enough discipline to set a tight trailing stop, you might be able to hitch a ride on the backs of the Shanghai traders, particularly through Hong Kong.
It's probably like buying the Nasdaq in 1999... Those who jumped in during the Internet craze doubled their money by early 2000. Of course, most who came late lost all those gains and much more.
So, are you bold enough to hop on what could be the greatest investment mania ever? Are you willing to risk that we could be at the top now… for the chance that the top could still be significantly farther away? Are you willing to pick up nickels in front of a freight train?
If you are and you're able to tightly control your risk, then you might turn out to be one of the few folks to make a buck out of this mania in Chinese stocks.
Good investing,
Steve
P.S. You can trade Hong Kong (with options, if you're so bold) through the Hong Kong iShares (EWH).
Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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