According to Herberts, China’s stock market is exhibiting signs of being in bubble territory as investors flock to get a piece of it.
“With China having enjoyed a significant bull run recently, is the bubble about to burst?” he asked.
“The Shenzhen and Shanghai markets have more than doubled in a year, and the Shenzhen composite has been trading on over 50 times its earnings. China’s stock market resemblance to that of Western markets in 1999 is partly the result of the vast growth in Chinese domestic investors, who seem to be fuelling a speculative bubble in Chinese equities.”
Herberts said inexperienced individual investors are investing in companies which they do not understand, but are still making money. This situation is being compounded by a rise in amounts of risky retail margin trading, with investors borrowing money from dealers rather than investing their own.
Even if you accept that Chinese markets are in a bubble, however, the inevitable fall may still be some way off.
“Stock market bubbles like China’s have usually proven to be unsustainable, but can endure for surprisingly long periods of time,” Herberts noted.
“This market may run for another few years before the bubble bursts, especially if the country’s growth regains momentum, helping to justify current valuations. It is likely that investors in China will be heavily brought back down to earth at some point but may well not get burnt just yet,” he said.