While the US stock market has gone largely nowhere in 2015 despite Janet Yellen's most impatient desire to push the Nasdaq solidly over 5,000 in hopes that "this is the missing catalyst that will finally unleash the 7 years delayed wage growth "trickle down" Keynesian success story, others are focusing on European stocks, where earnings continue to decline but hope springs infernal that P/E multiples at record highs due to money printing are perfectly justified.
What most are ignoring, however, is that when converted into USD terms, European stock gains promptly evaporate courtesy of the imploding Euro. In fact, the only market year to date that has shown truly impressive gains in both local currency and USD terms, is also the best performing market of 2014 - China, which is now up almost 100% in less than a year!
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But why? As we showed previously [11] the collapse of China's shadow banking system, which directly leading to a collapse in China's GDP, has been instrumental in the mouthwater ramp in the SHCOMP over the past 8 months.
However, there are other factors as well. Here, with the full list of what may be causing China's relentless stock market surge, is UBS' Tao Wong.
With no significant change in China's macro or corporate fundamentals, the visible rebound in China's A-share market since November appears to have been largely liquidity driven. We think this, in turn, may have been fuelled by a number of factors including:
- new funds flowing into the stock market from household saving, real estate, commodities and trust markets;
- banks' bridge loans provided to investors who lost access to other high-yield shadow banking products as the result of tighter regulation;
- the PBC's easing of liquidity conditions via a variety of "targeted easing" tools (e.g. MSL, PSL, etc.);
- the official launch of Mutual Market Access (MMA) between the Hong Kong and Shanghai exchanges;
- long-term expectations for SOE reform and A-shares entering the MSCI index next June;
- increased use of leverage by retail investors via margin trading; and
- market sentiment being boosted by expectations for further policy easing. Meanwhile, February’s RRR cut failed to meaningfully lower China’s interbank rates, likely due to continued sizable capital outflows and significant liquidity withdrawals from China’s money markets by recent IPO applications.
The keyword in all of the above is "liquidity" which means none of the surge is driven by real, fundamental drivers. Which also means feel free to get on the ride, but remember to sell before the inevitable outcome of every single liquidity-driven rally: the crash.
