Tocqueville: China’s Wall of Worry

Updated on

In his latest piece, Francois Sicart, Founder and Chairman of Tocqueville Asset Management, looks at the over-valued global market environment and points out that “While we wait for the day of reckoning…we should not be oblivious to potential opportunities, wherever they may exist. China may be a case in point.”

Digging deeper, Sicart looks at the negative media perception of China and believes “Many of the problems invoked in the headlines are real.  But they are neither new nor, I believe on investigation, as catastrophic as implied.”

He examines several elements of the China story in detail, looking at construction, China’s middle class reserve, the evolving consumer market, banks, currency and exports, reform, and the government’s role in each of these issues. While there are challenges in each sector, Sicart believes there are excellent opportunities as well.

Referring to current Chinese market levels, Sicart concludes:

“Does the Chinese stock market deserve to sell at a price first reached in 2001? If the answer is “no,” then opportunity awaits.”

China’s Wall of Worry

A former darling of investors, the Chinese stock market today has few friends

The U.S. stock market has had a well-publicized five-year rise without a major speculative blow-off.  In a recent private letter to friends, Bob Farrell, one of my favorite stock market historians and analysts, sees huge excess potentially developing in the persistence of rising prices and the general complacency about risk.  Yet for now, it seems to him, only one thing appears to matter: the Fed’s extended zero-interest-rate policy (ZIRP).  He is not alone.  According to the just-published annual report of the Bank for International Settlements (BIS), sometimes labeled “the central banks’ central bank”:

Financial markets have been acutely sensitive to monetary policy, both actual and anticipated….  High valuations on equities, narrow credit spreads, low volatility, and abundant corporate bond issuance all signaled a strong appetite for risk on the part of investors….  Overall, it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally.

I am sure that, sooner or later, we will have to pay the piper for whatever excesses have been developing; but an old stock market adage warns us not to fight the Fed.  Indeed, it is probably futile to try and pinpoint the day of reckoning, but there is another adage that I like even better:  “Don’t try to forecast the future, just be prepared.”  It is the reason for my ongoing caution.

While we wait for the day of reckoning, though, we should not be oblivious to potential opportunities, wherever they may exist.  China may be a case in point.

The full commentary is available from Tocqueville by clicking here.



Signup to ValueWalk!

Get the latest posts on what's happening in the hedge fund and investing world sent straight to your inbox! 
This is information you won't get anywhere else!