China has bigger bubble

BSE’s all-time high pales in comparison to the stock frenzy in China

HONG KONG: On a recent visit to Shanghai, a Hong Kong fund manager encountered a blind man queueing up outside a stock brokerage, asking the staff to help him buy shares. “Buy anything. They’ll all go up anyway!” the man said.

In the annals of stock market history, the blind, manic stock investor of Shanghai is as much a bellwether of a bubble market as the shoe-shine boy who gave Joseph Kennedy a stock tip in 1929 — and alerted the Kennedy family patriarch to the risks of an overheated market that culminated in the Wall Street crash that year.

Similar anecdotes of irrational exuberance abound on Dalal Street.

The gravity-defying six-fold appreciation in the Sensex over the past four years, driven largely by a flood of portfolio inflows from an investment world awash in liquidity, has induced a certain cavalier attitude among retail investors.

Even teenaged students and retirees have taken to playing the market aggressively, overlooking frothy stock valuations. Vishal Ruchandani, 19, has teamed up with nine of his friends to form an investment pool that punts on stocks.  

“We have a rock-solid portfolio,” Ruchandani exults. Likewise, Asadulah Bhat, 60, a retired banker, says he invested Rs 3 lakh, and made profits of Rs 60,000 in just three days.  

Similarly, in China, former HSBC chairman David Eldon points to a disquieting trend  — of some people giving up 9-to-5 jobs to take to speculating on stocks. And in recent times, there has been at least one instance of Buddhist monks renouncing their monastic life and taking to stock trading!

The stock frenzy in China has pushed up price-to-earning valuations in Shanghai to over 60 — which puts it squarely in the dotcom bubble territory. Even legendary value investor Warren Buffett has urged investor “caution”, noting that the benchmark Shanghai index has already doubled this year, on top of a 120 per cent rise last year. “It doesn’t make sense any more to play in such a market,” says Wang Zheng at Everbright Securities in Shanghai. It’s time to pull out.”

Yet, there are those who argue that the ‘bubble’ in China isn’t going to burst anytime soon. Says long-term China watcher Willy Wo-lap Lam: “There are today about 150 million stock investors in China, and the government won’t want to see them rioting on the streets because of a market crash. What the government will instead do is to push a string of big-money IPOs, which will enlarge the investment universe and also slowly suck out liquidity.”

And what of the Sensex? At current valuations, the Sensex price-to-earnings multiple is somewhat more tame (at about 25). But strikingly, FIIs are still betting big on the India story. Says CLSA equity strategist Christopher Wood: “I continue to insist, as I have for several years now, that India is the highest quality equity story in Asia. The reason: India is the only economy in Asia that’s driven primarily by domestic demand.”