Overnight, the Shanghai Composite fell 6.5%. It had been trading at a new high almost everyday for the last month. The reason for the drop was probably that the government tripled the tax on stock transactions to try to slow what it sees as an over-heated market.
But, is it?
The Shanghai Composite is up about 160% over the last year. Over the same period, the Tel Aviv 100 is up 48%. The Ibovesta Sao Paulo is up 64%. The IPC in Mexico is up 90%.
With no disrespect to any of these other economies, the Chinese markets deserve a huge premium. The company has a 10% annual GDP growth rate off of a very large base. The country’s trade surplus is staggering. And, it would appear that none of this is likely to end soon.
For European and US exchanges to drop in sympathy with Shanghai is to over-react to the market there. It may fall from time-to-time, but it is difficult to believe that, especially when compared to other world markets, its general direction is still North.
Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.
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