Investors keep claiming that equities are in a massive bubble, worldwide. To be sure, who would have thought that the stock markets rebounded as hard as they did from the lows of the March crash? No one I know… Economies are in the gutter. Unemployment in real terms has soared. The health crisis still prevents people from going after their daily lives. And, let’s not forget, there is the small matter of geopolitical conflicts and economic belligerence amid the American election campaign.
Then again, haven’t we learned from the history of the financial crisis that fundamentals are only one side of the equation, and the weaker one for that matter. What evidently counts a lot more is how many trillion dollars the Fed prints in how few months that keeps the party going. To be fair, wouldn’t the extra 3 trillion in the space of the last 5 months do the trick? It apparently does, and the majority of investors still haven’t understood how the game works.
Equally, though, it’s not just excess liquidity that is coming out of our ears and is being squeezed into risk assets at will. As we could all observe, we have been subjected to tectonic shifts in the stock market. What used to be incumbent stuff, industrial, banks etc, is no longer en vogue. It’s tech platforms, network builders, SaaS players, fin- and insurtech, payment companies, healthcare etc that are creaming it. But isn’t this the future of everything in any case? Why be surprised?
Also, the stock market isn’t just represented by the likes of Apple and Tesla whose shares keep defying gravity, have literally gone vertical and into the stratosphere and are worth gazillions more after every single trading session. If you look across the wider spectrum stock prices have undoubtedly rallied, but a majority of them have also corrected frequently and performed in a manner what can be viewed as sustainable long-term upward trends.
It is also interesting how markets keep defying the geopolitical backdrop. The proposed ban on WeChat, for example, has barely left a scar. Tencent stock did sell off in an initial reaction but is back in rallying mode. Apple’s China sales of iPhones, after all 30% of the total, could be massively impacted if Chinese consumers cannot access the existential app on their devices. It hasn’t even left a dent on the stock. The price instead rallied another 10% in a couple of days.
Chinese shares are on fire, whether they are listed in New York, Hong Kong or the mainland. Hardly anyone is bothered by Washington’s posturing of getting tough with NY-listings of Chinese companies. The HK stock exchange is booming despite the city being America’s pressure point with Beijing. The special status that has been withdrawn is already history, and the rumbles on Monday morning around depriving Chinese banks access to the dollar payment system were quickly shaken off.
The mainland exchanges look like a display of fireworks. More than two dozen companies making their debut on the Shenzhen stock exchange’s Chinext tech index under new IPO rules soared during Monday trading, gifting them a 200% performance on average, with one of them surging more than 3000%. Witnessing this bonanza will make every unicorn across the border think twice whether Nasdaq is such a good idea for their upcoming IPOs. Shenzhen’s Chinext and Shanghai’s Star markets are calling.
China’s foremost bellwether, Alibaba Group, had its version of a White House scare last week, with Donald Trump stating that he is looking into actions against the behemoth, but lo and behold, the stock already made an all-time high at the Friday close in New York, albeit by a smidge. Well, the Hong Kong session yesterday expanded on that smidge, with the stock soaring 5% and closing the US session in unmistaken record territory, setting it up for further long-term gains.
There was also a report on Bloomberg yesterday that institutional investors such as Temasek, Baillie Gifford and Matthews Asia have been busy converting their NY-listed stocks of Alibaba onto the HK stock exchange in Q2. Trump’s rhetoric is evidently being taken seriously by some investors. But instead of abandoning the stock market representation of corporate China, people find Hong Kong to be the better home for their very sizeable holdings in the company.
When Alibaba listed in Hong Kong in November last year, the free float was engineered to be even between primary and secondary listings. The wave of conversion in favour of Hong Kong will have created a disequilibrium, one that will only worsen from here. I think it is fair to say that Alibaba’s primary listing with regards to the volume traded has already become Hong Kong. Guess what kind of a symbolic effect this has for every Chinese unicorn out there…!
Back to the stock market and its lofty heights, real quick. Of course, we will easily live to see the next meaningful correction in prices and indices. When this will happen, we cannot know. As long as I hear people moaning about crazy valuations while they are still sitting on piles of cash, however, I wouldn’t be too worried. Eventually, they will all be squeezed into the action. At the same time, there is never any complacency to be had. I equally do heed the signs when I hear of some smart money reducing leverage and selling assets lately.
