Franklin Templeton Emerging Markets Expert, Mark Mobius, remains positive on China

It is always difficult to predict the top of the stock market, with a bear market inevitably following a bull run - and the present situation in China is no different, says Mark Mobius, Franklin Templeton emerging markets expert. “The “A” share market in China has become highly speculative as small investors try and beat the poor returns offered on conventional bank deposits, as interest rates have been kept deliberately low. Commentators are starting to call the possible and inevitable peak of the market here.”

On the positive side, Mobius says that several factors are supporting markets in China and the region could benefit from investors’ bullishness for much longer than outsider observers may believe. “The high and rather excessive valuations of the “A” market reflect the underlying perceived growth potential of these companies and the high risk investor appetite for Chinese securities. Another support factor is that Chinese government policy to contain the excess will be aimed at preventing a dramatic fall which has far-reaching social and political implications. The capital account is also well under control.”

But on the downside, Mobius cautions that with Chinese investors now being allowed to invest offshore, we could see a flight of capital into the heavily discounted Hong Kong-listed “H” and “red-chip” shares. There will also be some kind of government intervention to try and cool the expensive valuations.

Mobius remains bullish on the Chinese outlook and says its full economic potential is far from realised. “As the world’s largest emerging market, along with its entry into the World Trade Organisation, it is becoming a significant player in global trade. It is already impacting non-Asian emerging economies such as Brazil and Mexico by importing their iron ore and oil. With a population of 1,3 billion, strong consumer expenditures, per capita spending and retail sales growth, there are significant opportunities for investors.”

Although Mobius does not see any financial crisis in China in the next few years, he cautions that some form of correction in the local market cannot be ruled out. “The market valuations are excessive and have experienced rapid price appreciation. But the continued high growth rates in the region look set to continue.”