Well, here's an interesting howdy-doody. The Shanghai Composite Index has fallen nearly 50% since October, showing the dangers of investing in stocks with high valuations and expectations built into them.
China Stocks, Once Frothy, Fall by Half In Six Months
The sharp decline in Chinese stocks is approaching a milestone: With a 4% drop Friday, the market has fallen by nearly half since its peak last fall. The decline has wiped out nearly $2.5 trillion of wealth and is testing the government's apparent resolve to let the market find equilibrium on its own.
The plunge has slashed the savings of millions of Chinese investors who jumped into the market as it rose six-fold in two years. It is crimping expansion in the country's nascent financial sector and may put a squeeze in corporate coffers. But so far, it has not slowed the world's fastest-growing major economy.
The benchmark Shanghai Composite Index has lost 49% since topping out, along with other global markets, last October. The slide was triggered by the global economic slowdown combined with the lofty valuations of Chinese stocks. It accelerated recently as investors became convinced the government would not intervene to stop the fall. The index finished Friday at 3094.67, down 4%.
While Chinese shares have been among the hardest-hit anywhere, some other emerging markets have also had a tough time, falling 6% so far this year after rising an average of 32% a year over the past five years. The other big loser is India, which was the other big winner over the past few years. The Mumbai Sensex Index is down 19% so far this year.
I never was able to get too excited about the prospects of the Chinese stock market, because even many of the estabilished businesses there had extreme valuations, using such metrics as the P/E and P/S. Of course, there has been incredible economic growth in the country, but even so, expectations were getting too irrational and this fall marks the realization of that. Financial bubbles are becoming much more common around the world and are not a thing to play around with. Tech stocks were the rage of the '90's and still came crashing and burning to the ground. The housing industry was boosted to very inflated levels after the Fed lowered interest rates trying to minimize the economic trouble of the tech bust in 2000 and the following years. Today, investors have the opportunity to invest in many different countries with the click of a mouse. This also means individual investors are exposed to more bubbles than they've been used in the past. Thus, when investing in individual stocks, it's absolutely critical to analyze the company's financials carefully and make sure the company or stock isn't doing well through artificial measures such as temporarily low interest rates or short-term increase of investment. Just a little extra analyzing could go a long way to saving you from experiencing what can be very painful bubble pops. As interest rates here can very much impact a company in either a positive or negative manner, so is the case with companies around the world. This is why investing in international companies should take a little more work than you are used to, because as I'm sure you all well know, situations are very different country to country. Be cautious, analyze carefully, and be absolutely confident in the political and economic situation in a foreign country before investing in that country.
It's also worth mentioning that October was the peak for most stock indexes. Times like these can be frustrating for investors, but it's absolutely important to focus on the long-term. Short-term fluctuations can be very disheartening (I know from experience), but fretting over short-term movements is not on the Warren Buffett's and Peter Lynch's made their fortunes in the stock market. Find quality businesses trading at quality prices, hold for the long run, focus on long-term results rather than short-term speculation, and you'll sleep much better at night.
Tags:
bubble, china, correction, dow jones, india
Posted at: 07:15 PM | Add Comment
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