Mobius: Chinese stocks could plunge 20%

In the past year to April 14, investors have witnessed the Shanghai SE Composite index rocket by more than 94 per cent in local currency terms far outstripping global equities, data from FE Analytics shows.

It was also a huge turnaround in fortune compared with the 4 per cent fall suffered by the index during 2013.

Mr Mobius, who manages the £1.9bn Templeton Emerging Markets investment trust, said he thought a 20 per cent drop was possible for the index given the recent highs it had rapidly climbed to.

“It has gone a little too far and too fast,” he said.

A major driver of the rally has been the relaxation of the investment rules brought on by the recently launched Shanghai-Hong Kong Stock Connect programme.

The initiative allowed investors in China to invest in Hong Kong-listed, H-share stocks and investors in Hong Kong to invest in the local or A-share-class stocks. More recently, the rules have been eased to allow Chinese mutual funds to gain access.

The result has been a scramble for Chinese shares without regard to valuations or fundamental analysis that has begun to worry market experts.

JPMorgan Asset Management global market strategist Kerry Craig highlighted that the euphoric sentiment was evidenced by the weekly new investment accounts opening in the A-share market, which jumped to 1.67m accounts from the historical average of 240,000 at the end of March.

Stock Connect’s daily quota of $1.7bn (£1.14bn), the amount foreign investors can buy in the A-share market, is being fiercely tested on most days now, with the exchange link breaking that limit within the first half-hour of trading on one day.

Looking at the possibility of a market correction following the Chinese market’s meteoric rise, Mr Craig said: “Any asset class that has moved that quickly does look suspicious and I would expect some consolidation and profit taking.”

There is reportedly more than ¥1trn (£108bn) of borrowed money riding on the market as Chinese investors leveraged up to pile into the market, data from Bloomberg shows.

Mr Mobius said: “Too much credit is not a good thing in the long run. It could be a problem when the market turns.”

However, Mr Mobius tempered his comments and urged that the bull market in Chinese stocks was “intact”, and that it “can go for five to 10 years.”

Mark Williams, co-manager of the Liontrust Asia Income fund, remains bullish. He noted that while the Shanghai index had doubled since January 2014, the previous peak of 6,092.06 in October 2007 was still far away.

“While the valuations of many of China-listed A-shares appear to be straying from fundamentals, the Hong Kong-listed H-share equivalents that we invest in still tend to trade at a significant discount to their Chinese siblings,” Mr Williams said.

China’s stockmarket defies potential weak spots in economy

While the Chinese stockmarket has entered the stratosphere, the country’s economy has been running out of steam in the past year.

Official figures released last week showed that economic growth in the world’s second-largest economy eased back to its slowest pace since 2009, during the height of the global financial crisis.

In the three months to March 2015, GDP expansion was at 7 per cent on an annual basis, down on the 7.3 per cent in the final quarter of last year.

There are also mounting doubts about the accuracy of the official figures, given that unofficial economic data such as purchasing managers’ index figures show a contraction in China’s manufacturing sector in January and February.