China is obviously going through an unprecedented crisis and only time will tell when the stock markets will settle down. And where. But analyst speculators are not very bullish about the next year or so. As a team that’s working on analysis of unstructured data to understand stock trends, this is a very interesting time for us. Making sense of the current chatter and news and what analysts are saying is a significant step in getting our machine algorithms to refine themselves. Club this with everything around Greece and we are sitting on a potential Gold Mine of learned data.
But let’s concentrate on China for a now. How did we get here? What’s unique about the Chinese investing ecosystem? Are other markets going to see its impact? Are some of the questions on everyone’s mind. Well, Shenzhen and Shanghai have suspended 40% and 10% of their stocks, so one thing is for sure – this is not a short term crisis. This was a long time coming and will stay this way for some time.
Yes, it had been brewing for a while. The Shanghai stock market grew about 150% in 12 months. Investing activity went up like never before. All this at a time when the economic growth rate was continuously declining and reached half the levels of 2007. There was obviously more positive sentiment than there was room for. Unlike any other major global market, Chinese stock markets have 80% retail investors. Yes, 80%! And they were encouraged, more and more, to invest in stock markets over the last one year by easier availability of margin trading credit lines from brokers (encouraged by the government itself) by increasing difficulty in acquiring bank loans for real estate purchases. So, in essence, this environment was almost manufactured, one can say.
This was just bad timing. Given the market surge and overwhelming positive sentiment, a correction was always around the corner. This coupled with the realization that economy is not growing, after all. And got further amplified by the lack of institutional participation in the markets. Everything came together at the same time – and it looks like sentiment, actually, has turned dangerously negative now! So while our analysis will point to drastic changes in sentiments, a clearer picture emerges when one looks at the data which could have helped us “predict” this negative sentiment – fundamentals. Fundamentally, not much changed, really, when the markets grew. But the investors ignored this.
In the coming posts, we will talk about how one can deal with this situation has an individual investor.