Shanghai Stock Exchange Composite index ended the week at 2,747.23 on July 6, 2018, this is approximately a 22.82% decline from the recent high of 3,559.47 achieved on Jan 24, 2018. By the commonly agreed definition, it is already in a bear market, and the very first major economy whose stock market entered into a bear market. The GDP of China is pretty much set to meet the target, who dares to challenge it? It is the goal of the government and it will be met. However, the stock market, arguably more reflecting the fundamental economic activities of China these days, seems to be saying something quite different.
We here at Fuji Corporation had stock investments in Chinese A shares for quite a long time and we follow the same approach that we apply in other markets – value-oriented investing. Below is our results as of 6/30/2018: from beginning of 2018 to 6/30/2018, Shanghai Composite Index declined 16% while our holdings there appreciated 9.49%. Since 1/1/2016 to 6/30/2018, Shanghai Composite Index declined 21.57% cumulatively while our position delivered a cumulative return of 131.66% at the same time maintaining an approximately 10% in cash.
I have been studying Shanghai A shares for quite some time and my conclusion was that there weren’t too many opportunities there that met our criteria. As a result, I have not made any purchase for quite a while. This may well change over next couple of months. I have been tracking closing a few stocks there and one of them is at the range that I may consider making an acquisition. As the bear market goes on, sentiment may well drag down the other companies that I have been following (but are selling at very high prices). Once that opportunity arises, it is who has the cash available that can seize it.
We may significantly allocate capital to Chinese stock market over the next few months depending on the development of the bear market there. We may utilize short term borrowing to just bridge the gap between acquisition there and sale in a few US positions that are properly valued and not deemed as short term profit subject to high tax rates.
Things will become a lot more exciting!