China's Share market - danger signs or opportunity?

Mark Draper (GEM Capital) spoke recently with Andrew Clifford (Chief Investment Officer - Platinum Asset Management) about the recent volatility in the Chinese share market.

Andrew provides some perspective on what is going on at the moment, and why he continues to believe in the medium term benefit of investing in China.

 China’s Share Market, Dangers Signs or Opportunity?

Mark Draper: Andrew, the Chinese Share Market has had a pretty interesting run over the last, really 5 years. It has come up from a low base and then we have had a pretty significant correction in recent times. Is this the beginning of the 1929 saga as it been regularly put forward the media or are you able to put some perspective for us?

Andrew Clifford: I think you just need to step back a bit and see where the run-up in this market began. If you go back 18 months ago the market was down 65% over the previous seven or so years which really makes it one of the great bear markets of history. There are not many bear markets that were going down that far for that length of time and so you know what started to happen was that there was some sense that policy was going to be eased particularly around lending restrictions over in the market, and as markets do when they sort of see that, took off on a great run. Now undoubtedly parts of the market became very speculative. They were very much driven by individual investors, lots of margin debt and it all fell apart. Now the government interferences were really not being helpful but if we step back and think about the longer term these Chinese A shares, it is very interesting that it is a market where there’s very little institutional investment . Over a longer period of time payers like pension funds and insurance companies have minimal, if any exposure to shares and it’s not likely to be the case five years down the track. There are fears the government will have to liquidate this rescue fund they put together. Indeed they should have had the rescue fund but the long history of these rescue funds and there being many in 1987 in Hong Kong and 1997 a number of countries across the region, indeed I think in 2001 we also had them and you know the governments have a very strong staying power. In the order of forty or fifty billion dollars of stock bought. Well perhaps it sounds like a big number but in the context of the Chinese government it’s not really, it’s a very large economy. So we think as investors people get too excited about these day to day moves, for us we’ve got some great companies, some of them listed in the A share market in China. The really good companies actually haven’t come off that much then, more of the order of 15 or 20 percent rather than the very dramatic falls and the more speculative parts of the market and indeed for us that just an opportunity to buy some more of these companies.

Mark Draper: So you’re really saying that normal market function, it comes off a low base and really some investment opportunity rather than something very ...

Andrew Clifford: Essentially it’s a little more wild than your average market but that’s what happens when as it is today 80 percent of investments are retail investors but through time, for the moment that’s actually the opportunity for longer term buyers and over time I think that will change.

Mark Draper: Andrew, thanks very much for your time.

Andrew Clifford: Yeah, thank you.