NEWS/BLOG

Share Prices Promp Re-Balancing

Gao Xiqing, vice-chairman of the China’s National Council for Social Security Fund, has been quoted as saying concerns that the rapid rise in mainland share prices is unsustainable.

He has been selling shares to re-balance the fund and reduce its exposure. The fund is obligated to limit its holdings in domestic stocks to 30% of its total assets. With soaring prices, such shares now account for nearly 40% of its portfolio.

The benchmark Shanghai Composite Index has risen 41% this year, after its 130% increase in 2006. Mainland share prices are now valued at more than 40 times 2006 earnings and nearly 30 times 2007 earnings, compared to a price-earnings (P/E) ratio of around 16 for the MSCI China Index, which covers China-based companies listed overseas.

First Quarter Update

Markets have recovered from the Shanghai surprise on Feb. 27, when the Shanghai Composite fell almost 9% on fears that the Chinese government would intervene to slow down the market. The Chinese market fell like, well, a brick, leaving a lot of the experts saying “I told you so. Don’t put more than 5% of your investments in developing markets.” The trouble, markets around the world also tumbled. International investments are no longer a hedge as they once were. For that matter gold and gold mining stocks aren’t either. 

Even after its plunge, the Chinese stock market was the best performer among major emerging markets in the first quarter of 2007. The Dow Jones CBN 600 Index, which reflects about 80% of China’s market capitalization, has gained 42% in the first three months of the year.

The Shanghai Composite Index, which tracks shares listed on the larger of China’s two stock exchanges, has gained 19% year-to-date. The index rose 130% last year, making it the top performer among major benchmarks in 2006.

The second-best performing emerging market index in the first quarter was the Malaysia Composite Index, up nearly 14% on the year. The country’s major exports include electronics and electrical goods, oil and gas, and agricultural products. The Malaysian government appears to be encouraging economic growth.

Turkey’s IMKB-100 Index ranked third with a nearly 12% gain so far this year. The top performer of 2005, Turkey disappointed in 2006 with a decline of 1.7%.

Europe’s House Prices Dip

In recent times expats have not been drawn to Europe by housing prices, which,.over the past decade, have surged in France, Spain, the Netherlands and Ireland. But now housing prices be leveling off in some areas as interest rates increase. Seven rate hikes by the European Central Bank since the end of 2005 and the likelihood of further increases are making an impact.

Housing prices in Ireland have ceased their meteoric rise in February for the first time in more than four years. French housing starts plunged 15.1% in the three months through February, the steepest drop since January 2001.

House-price inflation in Spain slowed below 10% in the fourth quarter of 2006 for the first time since 1999. The price of vacation homes is likely to drop by as much as 10% this year, according to RR de Acuna & Associates in Madrid, which values real estate for about 40% of mortgages. Housing construction has been a major cause of Spain’s economic growth. Spain has traditionally been a favorite among Northern Europeans seeking second homes, but overbuilding in coastal areas has made it less attractive recently.

The inflation in U.K. housing prices may also be slowing, according to S&P. The Bank of England has raised its main interest rate to 5.25%, the third increase since August.