Michael Pettis on China Stock Outlook

Our favorite China analyst is out with an informal projection of Chinese stock market performance for this year. The full text can be found here:

 

Highlights:

The first and most obvious question now is whether the latest interest rate hike will hurt the market.  I am pretty sure it won’t, except for some of the most obviously liquidity-dependent stocks, like real estate developers…

In general I think ample liquidity is going to drive stocks higher until at least the end of the summer (assuming of course, perhaps unrealistically, that no more countries unexpectedly fall into default or revolution).  But later this year I think a lot of people are going to be rethinking their positions, and investors should be prepared for a rocky end of the year…

…by the end of this year a lot of insiders are going to be wondering about the policy objectives of the new leaders and whether it is indeed true, as the rumors have it, that they are uncomfortable with the current investment-driven growth model.  Any revision of the model will inevitably have big impacts on growth, profitability, and commodity prices.

But until then the market should be strong…

There you have it. His outlook in brief seems to favor being long until the end of Q3, and out – or perhaps short for the more intrepid – some time in Q4. As always, we’ll do our own analysis and let the market data lead our positioning.

In the interest of full disclosure, I am long the iShares FTSE China 25 and the Matthews Asia Dividend funds.

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