When Sean Taylor looks at China’s soaring stock prices, he sees a market more disconnected from economic fundamentals than at any other time in a two-decade career.
His advice to investors? Keep buying.
The London-based head of emerging markets at Deutsche Asset & Wealth Management, whose developing-nation equity fund has outperformed 94 percent of peers tracked by Bloomberg this year, says what matters most in China right now is that policy makers have the motivation and firepower to keep the world-beating rally going.
Rising stock prices not only help Chinese companies reduce debt levels by selling new shares, they also make it easier for the government to boost budget revenue and push forward on privatization plans through stake sales. One way policy makers can support further gains is through further monetary stimulus: banks’ reserve requirement ratios are almost 6 percentage points higher than the 15-year average, even after two cuts this year.
“The government wants a strong stock market, to privatize more companies and do more IPOs,” Taylor, whose firm oversees about $1.3 trillion, said in an interview in Hong Kong. He has an overweight position in Chinese shares.
The Shanghai Composite has gained 141 percent in the past 12 months, the most among major global benchmark indexes. The gauge closed little changed today.
The following six charts underscore the disconnect between Chinese stocks and the economy.
*Shanghai Composite performance: The index rose last week to its highest level in seven years, while Bloomberg’s monthly gross domestic product tracker for China is near the lowest since 2009.
*Financial stocks: The CSI 300 Index’s gauge of banks, property developers and brokers climbed to its highest level since January 2008 last week. Data on May 13 showed the M2 measure of broad money supply grew 10.1 percent in April from a year earlier, the smallest expansion on record.
*Commodity producers: The CSI 300 Materials Index capped a 13th month of gains in May, its longest winning streak on record. Fixed asset investment rose in April by the least in almost 15 years.
*Retail stocks: The consumer discretionary index has rallied 75 percent this year to a record. Retail sales grew 10 percent in April, the slowest pace since 2006.
*Room for more stimulus: The central bank has lowered the amount of reserves lenders must hold to 18.5 percent from 20 percent this year. That compares with the average ratio of 12.6 percent since the start of 2000.
*Stock sales: Chinese non-financial companies raised a net 230.4 billion yuan ($37.2 billion) in the first four months of the year, the best start on record, while net sales of corporate bonds totaled 543.8 billion yuan, the lowest for the period since 2012.