China’s Economy: Buoyed by Sentiment?

What sways the market? What makes stock prices move from one point to another? You would assume it’s largely based on intrinsic value.

Let’s use an example. Let’s say there’s a new breakthrough technology on the market. It allows one company to produce goods far cheaper than its competitors. No prizes for guessing where the company’s stock price will go.

A company’s intrinsic value can also be affected by contract wins. If a company can manage to acquire a few more long-term customers, then it means more revenues and, hopefully, profits in the future.

It therefore follows that more investors would be willing to pay to get their slice of the company’s earnings.

However, these two scenarios don’t explain the volatility we constantly see in the market. A company like BHP Billiton [ASX:BHP] constantly changes in value. One day it might be up, another day it might be down.

What’s causing these fluctuations?

Well, it isn’t intrinsic value. Instead, it’s what investors perceive to be the value of BHP. An opinion is the cheapest and most common commodity in the world. Everyone has one and they are more than willing to share it with you.

Often, there is never a unanimous opinion on certain companies, sectors, industries and even nations. Instead of what’s actually important — intrinsic value — human irrationality dictates the price of BHP tomorrow.

This isn’t a bad thing at all. In fact, conflicting views are how people are able to make money in the market. If everyone thought the same way then prices would be constant forever.

I know many of you might think that consumer, investor or even business confidence is a load of bull. And I generally agree that certain confidence indices don’t say much.

However, you cannot deny that confidence, in whatever market, plays an important role.

Confidence on China picks up

As you’ll already know, China has been slowing down of late. Ken Rogoff, the former chief of the International Monetary Fund, said, ‘I think the economy is slowing down much more than official figures show.

He believes China is the greatest threat to the global economy. If they slow down and run out of puff, where are we to turn?

But I’m glad we don’t all have the same opinion as Ken Rogoff. If we didn’t, we’d all believe we’re doomed.

Yet according to the Australian Financial Review, China could be showing signs of picking up:

China’s economy is showing fresh signs of strength, from increased business confidence to an expansionary factory gauge reading, according to the earliest private indicators for September.

Most private gauges showed improvement and a proxy for factory activity jumped to the strongest level in almost two years, suggesting better readings in August data have been followed up this month.

A steady flow of credit has boosted property sales, helping offset sluggish exports and continued weakness in private investment.’

China is obviously very important to Australia. They are our biggest exporter by far. They not only gobble up our commodities, but our consumer and agricultural products as well.

If you’re an Aussie investor, then you’ll also care about China’s performance. Not just because of what the implications of a bad performance would mean, but also because of its effects on confidence.

While it had nothing to do with performance, China’s ecommerce tax sent many Aussie stocks down. Their plan to tax goods bought online (shipped into Australia) would obviously harm the revenues of some Australian companies.

However, the tax law, at the time, was not specifically defined. Instead, China changed and amended the policy on the fly.

And because some factors weren’t concrete, investors should have kept their cool. But did they? Of course they didn’t. Many companies were sold off on the fear of the then-new Chinese ecommerce tax.

Other improving Chinese figures according to the AFR include:

  • Small to medium-sized enterprise confidence;
  • Satellite Manufacturing Index, which shows industrial activity;
  • The Market News International China Business Sentiment Indicator; and
  • The S&P Global Platts China Steel Sentiment Index.

So will China’s woes end soon? It’s hard to say. There will always be those who are out to spread doom and gloom. But pessimism is a dominating outlook when things are uncertain. China has many hurdles to climb still, as their economy continues to grow.

One thing is for sure: Australian companies will closely watch China’s movements. Globalisation has allowed companies to expand their market size considerably. And in the future, none might be bigger than China’s.

Härje Ronngard,

Junior Analyst, Money Morning

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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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