Forget the January effect–this year watch the Lunar New Year effect
When thinking about when to buy Chinese stocks, don’t forget the Lunar New Year effect.
China’s New Year holiday stretches from February 13 to February 21 this year. And Shanghai and other Chinese stock markets will be closed for five days from Monday February 15 through Friday February 19.
Counting weekends that means nine days with no trading.
In preparation for a long-break with no buying or selling stock traders usually work hard in the days before a holiday to square positions. In the case of China’s stock markets that’s likely to mean selling to limit exposure during the long no-trading period. (Would you want to be unable to sell if something in Europe, for example, really went south?)
At the least the holiday is likely to add volatility to an already volatile market.
A holiday sell-off would likely produce a post-holiday rally.
The euro crisis isn’t a global crisis–yet
One crisis or two?
How you answer that question goes a long way to determining your investment strategy right now.
If the euro crisis and the bank lending crisis in China are all part of the same crisis, you should stay out of all equity markets until the world works through this mess. (Enjoy your vacation. See you in September.)
If, however, the euro crisis and the bank lending crisis in China are coincidentally but not causally related—that is they happen to both be occurring now but one can be solved without a solution to the other—then you should be use the sell-off in emerging markets as a buying opportunity somewhere not too far down the road, late March or April, say–even if the euro crisis continues to unfold.
Here are the two ways to view the cause(s) of the current correction.
Reassuring talk isn’t ending the euro crisis
Talk is cheap. And not terribly effective, even when it’s coming out of the mouths of Europe’s financial leaders, in ending a financial crisis like the one that continues to engulf Europe this morning (February 8).
The current phase of the crisis started in Greece, when the Greek government finally admitted that its budget figures were a fiction and the budget deficit would be a huge 12.7% of GDP. Traders and investors have sold Greek bonds and stocks ever since.
As of noon today in London the prices of Greek bonds were down again with the yield on the two-year Greek government bond rising to 6.61%. (For comparison, the yield on the two-year German government bond is just below 1% and the yield on the two-year U.S. Treasury note is 0.77 %.)
Greek stocks haven’t fared any better. National Bank of Greece and EFG Eurobank Ergasias, the country’s two biggest banks, were down 4% this morning.
Over the weekend, European financial officials talked tough about the crisis. “The European members of the G-7 will make sure it is managed,” French Finance Minister Christine Lagarde said on Saturday, February 6, after a meeting of Group of 7 financial ministers and central bankers in Canada. The European Central Bank is “confident” that Greece will cut its deficit to the 3% European Union limit by 2012, said European Central Bank President Jean-Claude Trichet.
Even U.S. Treasury Secretary Timothy Geithner weighed in. “I just want to underscore they made it clear to us, they the European authorities, that they will manage this with great care,” he told reporters.
Trouble is that everyone knows that there’s not much backing up the rhetoric.
Update HDFC Bank (HDB)
At the end of January the Reserve Bank of India, the country’s central bank, held a conference call for analysts and investors.
The message: The bank is worried about continued growth in government borrowing and strong demand for loans from the commercial sector. And that the bank will move to reduce excess liquidity in the banking sector before it leads to rising expectations for higher inflation.
Look out Indian banks, higher interest rates ahead.
I’d be surprised if Indian bank stocks didn’t retreat as the Reserve Bank of India moves from rhetoric to action.
Shares of Indian banks such as Jubak Picks 50 member HDFC Bank (HDB) are already down 20% since January 19 as part of the global correction in emerging markets. Any further decline would give long-term investors who are impressed, as I am, by the results out of Indian retail banks a chance to get into (or add to positions in) the sector at a reasonable price. (For more on building a global portfolio see my post http://jubakpicks.com/2010/02/05/how-to-build-a-global-portfolio-what-countries-do-you-want-to-own/ )
How to build a global portfolio: What countries do you want to own?
If you were building a global stock portfolio for the long run—let’s say 2020 and beyond—how would you weight the world’s stock markets?
Personally, over that time period I’d pick India over China, Poland over India, and Brazil over them all. And I’d give U.S. stocks a bigger piece of the pie than they’d earn if you looked just at near term numbers.
