Monday, May 17, 2010

China stock market entered bear market, a reason to be concerned?

(Bloomberg)The Shanghai Composite Index dropped 136.69, or 5.1 percent, to close at 2,559.93, the lowest since May 4, 2009. Today’s decline is the biggest since Aug. 31, when the gauge fell 6.7 percent on concern a slowdown in lending growth would slow economic growth. The CSI 300 Index retreated 153.31, or 5.4 percent, to 2,714.72.

The Shanghai index has lost 22 percent this year, the world’s fourth-worst performer among the 93 gauges tracked by Bloomberg, on concern the government will keep tightening monetary policy to contain inflation and avert asset bubbles. The measure on May 11 entered a bear market after falling 21 percent from its Nov. 23 high.

Equity losses have dragged valuations on the Shanghai index to 19.1 times reported earnings, compared with the multiple of 37 times in July 2009, according to weekly data compiled by Bloomberg.

Premier Wen said the government will “decisively” contain excessive increases in housing prices in some cities and curb growth of industries with overcapacity, the official Xinhua News Agency reported May 15. China should keep the strength of macroeconomic controls “reasonable” and boost policy coordination, Xinhua said, citing Wen.

I believe these actions and developments are lengthening the bull run around the world. BUT, big BUT, I'm still maintaining my stance that the consolidation and correction should(not necessary will) continue for 1-2 months to take the steam out of the system.

I noticed Shanghai Composite Index had been under pressure(government induced), that was the reason I decided to sell out Parkson earlier. If you ask me why I have not selling out XDL yet, it's because the stock has been sold down too badly and I prefer to sell on rally later. I however will cut loss at $ 0.32.

Comment on our Bursa, as usual our Bursa is still pretty resilient, especially Bank Negara Malaysia was hiking interest rate again last week(on much stronger economy outlook). This will continue to increase demand for Ringgit causing it to strengthen further for a while. Ringgit strength and KLCI have been positively correlated lately. But I think I'm still on the cautious side and not ready to dip my toe into the market yet. It's better to miss a 5% gain rather than end up with 5-15% losses.

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