The central banks dominated the markets in April. An interest-rate hike in the United States appears unlikely before September, while the ECB is ensuring negative yields even on 10-year government bonds. Besides these topics, we also look at the two Asian giants in this issue. China does not need any more tutoring on the subject of capitalism. The stock markets there follow current western logic as a matter of routine: good economic figures are good, but bad figures are good too because they promise a more caring central bank.
In the first quarter, China’s economy grew at its slowest pace since 2008, 7%. Even this figure is hard to square with the quarterly figures of Chinese companies. But anyone who approaches Chinese stock markets on the basis of fundamental analysis has lost already. And has ceded the field to those domestic private investors who in March alone opened more than four million new securities portfolios and whose securities purchases on credit already account for 1.8% of gross domestic product (GDP).1 Their buying frenzy has caused the Shanghai A Share Index to double in price in nine months and has recently spread to the better-established Hong Kong Stock Exchange. This can be interpreted as a catchup process, since China’s stocks were valued with a price-to-earnings (P/E) ratio of 102 as recently as mid-2014. Now it is 20, commensurate with the emerging-economy average. Nevertheless, this aggregate view obscures the fact that 36% of the index is allotted to the financial sector, which has a P/E ratio of only 12, which in turn means a P/E ratio of 36 for the industrial sector. Hopes for Chinese monetary and fiscal stimuli in the second half of the year are the main reason why investors are pouncing on these stocks despite generally bearish macro figures.
India’s stock market is profiting from advance praise too. Prime Minister Narendra Modi, who has been in office since May 2014, is expected to advance structural improvements in the land of eternal hope – through labor-market, common-law and tax-system reforms. The aim is also to improve the infrastructure that up to now has prevented India from challenging China as the workbench of the world. While both countries are profiting from cheap oil and the scope for easing monetary policy, India has several advantages over its rival: a significantly younger population, better debt ratios3 and a lesser dependence on the global economy (with an export ratio of 15% vs. 22.4% for China). In 2015, it could grow faster than China for the first time. These are all reasons why we currently favor Indian stocks even more than Chinese.