China’s Stocks Are Still Pricing In a Lot of Pain
Investors appear to be preparing for the worst, even if such an extreme outcome is unlikely.
It may not be catastrophic, but it doesn’t look good.
Photographer: Qilai Shen/Bloomberg
Things are never as good or as bad as they seem. That adage has generally served investors well. Ignoring the extremes of optimism and pessimism can spare equity buyers some painful mistakes — such as piling into tech stocks at the height of the dotcom boom — and may signal lucrative opportunities for the brave, such as during the depths of the 2008 global financial crisis. It’s worth asking where China’s stocks currently lie on this perceptual continuum, and whether markets are correctly judging the risks that confront them.
March has been a landmark month for the nation’s equities, with a two-week rout that wiped out more than $1.5 trillion of value followed by a rebound that was almost as spectacular. Prices recovered so quickly (after top policy makers stepped in to pledge support) that the plunge now looks like a flash crash. Yet the rally has only returned Chinese stocks to the depressed levels where they stood before going into freefall, with upward momentum having stalled in the past two weeks.