China and The SSE’s Great Bull Run

Posted on May 22, 2007 , filed under Stocks | Print This Post

Mention China along with the Shanghai Stock Exchange (SSE) and you will often get gasps at the staggering rise of the market. The recent bull run has many investors comparing Shanghai’s market with that of the .com bull run of the late 90’s. I believe many of the comparisons are valid. It took the Shanghai Composite Index roughly two years to rise from 1000 to 2000, yet only a few months to rise from 3000 to 4000. Clearly market sentitment in Shanghai is bullish. Local newspapers in China are constantly reporting that new daily records are being set for the number of brokerage accounts being opened by individual investors.

All of the bullish news being released from China about its GDP growth, foreign investment and private equity markets has me asking how much longer can the SSE continue to rise? This question has me revisiting the three typical stages of a bull run. Here is a summary the three stages, without going into great depth:

Stage 1 typically finds contrarian investors entering the market as it hits a bottom
Stage 2 is typically when institutional investors enter the market and the media picks up coverage of the bull run
Stage 3 is typically when the individual investor catches wind of the investment opportunity

In Shanghai I believe we are definately at the markets last legs. I expect to see another 10-25% upside in the market over the next 6 months to 1 year. The momentum in the press is strong in China. There is a common belief shared in the housing and the stock market in China, that the central goverment in Beijing will do its best to avert any major economic downswings prior to the olympics in 2008. Hot stocks like Baidu.com Inc. (Nasdaq: BIDU), Ctrip.com International, Ltd. (Nasdaq: CTRP) and China Petroleum & Chemical Corporation (NYSE: SNP) have become watercooler and cocktail party chat.

If I compare the .com bull cycle to that of the SSE, I believe we are in early 1999 instead of early 2000. The hot money from the individual investor in China is beginning to flood the market, IPO’s are still heavily sought after and institutional investment has yet to exit the market. There is still room for the number of brokerage accounts in China to continue growing.

Those seeking to take advantage of the final portion of the SSE’s current bull run would be well advised to pick their positions carefully. As always, the best way to invest is to buy good companies with strong long-term prospects. Investing in stocks is always about investing in expectations. Real investing is about investing in business and that translates into strong earnings and dividends.

Disclaimer: I am currently short 150 shares of BIDU at $132.25.

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