Thursday 15 February 2007

Maybe It Isn't a China Bubble, but It Looks Like One

The Chinese stock market has accelerated to the heights over the last several years as this chart of the iShares Xinhua China25(FXI) from Yahoo shows.

Inevitably the talk has started that a new stock bubble is underway. A couple of examples articles: Tom Lydon at Seeking Alpha, Business Week's China's Bourses: Fasten Your Seatbelts. Reports that major companies which are components of the FXI Index are sporting P/E's over 40, not sustainable in the long run, add to the out-of-wack feeling. China's economic growth has been especially strong but challenges lie ahead on the pollution and resource fronts. Finally, and especially worrying are the comments that ordinary people on the street in China are talking about stocks and pouring their money into the market. It is all too reminiscent of the Internet bubble days when it seemed friends and neighbours all wanted to talk about Nortel and Cisco.

As a result, despite the admonitions of the "pros" and my own general philosophy to buy and hold for periods of years, I have sold an amount equal to my original investment in FXI, which still leaves a healthy chunk due to the meteoric rise of the past year. I may be wrong and FXI will continue to go gangbusters but caution becomes more important with age!

Update March 4 - Should have sold all of it in the first place; suffered a $6/share reduction in profits before I finally got out completely of FXI. Stories like this one at CTV just reinforce that I have done the right thing. Learning slowly still but at less cost thankfully.


Anonymous said...

Perhaps it is a bubble as there was a large 9% correction yesterday in the Chinese markets.


CanadianInvestor said...

Ssssssss .... more air escaping the bubble today. But ouch anyway, since everything else is getting dragged down with it, including good investments. The trick is taking advantage of the good stocks that get sideswiped. My problem is that I don't have that much cash lieing around.

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