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					Will Chinese Stock Markets Mirror the Behaviour of the NASDAQ?
-Where is the solution?

Christopher Poll Chairman, Greater China Consultancy Ltd.,

3 QUESTIONS RAISED
• HOW TO DEFINE A “WELL REGULATED MARKET”? • WHAT RELEVANCE A PRICE/EARNINGS RATIO? • IF INSTITUTIONAL FUNDS ARE A STABILISING FACTOR FOR THE STOCK MARKET, WHY ARE DEVELOPED MARKETS SO VOLATILE?

HOW TO DEFINE A “WELL REGULATED MARKET”?

The Financial Markets are Dynamic
• Business is “Proactive” • But Regulators are “Reactive” not “Proactive • The System of Regulation and Enforcement can never be completely Flexible and Dynamic • Importance of Fiduciary Responsibility

Financial Infrastructure
MAIN FACTORS FOR FUNDS
Centred around Government Public Investors

Financial Policemen

Institutional Managers

Government Regulators and Central Bank Financial Policemen are advisors to
(Follow and abide by Rules & Regulations)

Quoted Companies on Stock Market and Privatised Industries Previously Nationalised

Accountants Lawyers Merchant Banks Commercial Banks Stock Market

Investors Institutional - Pensions - Insurance Co.(life) - Mutual Funds Private Investor - Direct - Indirect

23

PRIVATE SECTOR

Accountants

Lawyers

Investment Bankers

Stock Brokers

Commercial Banks

Conflict of Interest?

Conflict of Interest
• Who is the client? • Who are the Financial Policeman Responsible to? • Can Regulation be Protect with Financial Policemen being Proactive?

INVESTORS

Institutional

Private

Pensions

Insurance

Mutual Funds

Investors’ Confidence = Investors’ Education

Confidence

I n v e s t o r s

Education

Investor Protection/Confidence
Competetion = Accountability

Transparency

Disclosure

Timeliness

Accuracy of Data

Analysis

Information/Reporting

Education

Efficient Infrastructure
Transparency

Accountability
Leads to: • Easier and more effective enforcement. • Increased efficiency reduces costs. • Improved flexibility of the infrastructure to respond effectively and competitively.

A Chinese Tailor Made Solution for the Chinese Fund Industry
Securities Dealers Brokers
Securities Exchange

Stock Investors
Investors’ behaviour Fund Investors Fund Managers Securities Investment Advisors

OTC
Futures Exchange

SEC/CSRC

CBC/PBC

WHAT RELEVANCE A PRICE/EARNINGS RATIO?

1995 - 2000

Confidence

NASDAQ Corporate Profits ???

Chinese Quoted Stocks Corporate Profits ???

$$$

IF CONFIDENCE IS LOW C

THEN MONEY FLOW IS MINUTE

$

IF CONFIDENCE IS HIGH

CONFIDENCE

THEN MONEY FLOW IS LARGE

$$$$$$$$$$$$$$$$$$

What is the Criteria For Investing?

1. What do you think is the most important influence on the stock market in China today? • The historic balance sheets and profit and loss accounts of the quoted companies- 6 • The future prospects for corporate earnings10 • Government policy-62 • Govt. investigation into mal practices15 • The overall economic growth of the Chinese economy-27 • China's entry into the WTO-8

2. How do you as an investor analyse the fair value of the companies you buy & sell?

• • • •

By price earnings ratio-35 By relationship to net asset vale-5 By the latest rumour-58 By the business sector the company is involved in-21 • By multiple of sales revenue-9

3. What do you think should be the average prospective price earnings ratio for nontechnology stocks?

• under 15 times-0

• 15 to 25 times-18
• above 25-110

4. What do you think should be the average prospective price earnings ratio?

• under 15 times-0
• 15 to 25 times-1 • 25 to 50-16 • over 50-111

5. How do you measure investment risk?
• By measuring the volatility of the stock-31 • By measuring the volatility of the stock market-42 • By estimating the accuracy of disclosed information-16 • By estimating the risk of fraud-17 • By analysing historic returns-13 • By comparing with and adjusting for a "risk free" measure such as a deposit rate-8

At what level do you think the Shanghai A share market will be on 31st December 2001?
• most think it will be above 2500 • Today it is 2140

At what level do you think the Shanghai B share market will be on 31st December 2001?

• most think it will be above 200 • Today it is 183

IF INSTITUTIONAL FUNDS ARE A STABILISING FACTOR FOR THE STOCK MARKET, WHY ARE DEVELOPED MARKETS SO VOLATILE?

Factors Effecting Investment Time Horizons
• • • • • • Confidence in Long Term Trends Confidence in Information Disclosure Volatility of Markets Liquidity of Markets Profit Forecast Public Scrutiny of Performance

Return and Risk Tradeoff: 1/1990-12/2000
25.0% Equity Hedge 20.0%
Annualized Return

15.0% 10.0% 5.0% 0.0% 0.0%

EACM 100

S&P/Lehman Port.

Global Macro S&P 500 Event Driven

Relative Value Lehman Bond

5.0%

10.0%

15.0%

Annualized Standard Deviation

EACM 100: Equal Weighted (Rebalanced Annually) Index of Hedge Fund Indices described on Previous Sli

Risk and Return of Stock, Bond and Hedge Funds: 1/1990-12/2000
Portfolio Annualized Return

18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 0.00%

100% EACM 100

100% S&P 500

50% S&P 500 and 50% Leh. Bros. Bond

100% Lehman Bond

2.00%

4.00%

6.00%

8.00% 10.00% 12.00% 14.00% 16.00%

Portfolio Annualized Standard Deviation

China versus Western Markets
• Limited sense of Accountability • Little Understanding of Risk • Chinese Business Philosophy • Reluctance to Incentivise Executive Managers

• Entrepreneurs Understand Cause & Consequence • Risk is Fully Understood • Shareholder Accountability is accepted • Share Options and Profit Incentives

Basic Concept of Funds as an Investment Vehicle
FUND COMPANY

REGULATOR

FUND
ASSETS BENEFICIARY CERTIFICATE

CUSTODIAN

POLICEMEN

MONEY

INVESTORS