Stocktake: Chinese investors go gaga for technology shares

Proinsias O’Mahony takes a look at the ups and downs of the stock market

Chinese investors go gaga for tech shares What do the 50 top-performing global technology companies with a market value of at least $1 billion have in common? Answer: every single one comes from China.

That was one of many eye-popping stats contained in a Bloomberg piece last week examining the frenzy for Chinese tech shares.

China’s technology sector is up some 70 per cent this year; the average tech stock trades on 220 times earnings, more than that seen at the peak of the US dotcom bubble in 2000, while the median stock is twice as expensive; the top-performing stock over the last year has multiplied 19-fold; stocks that started trading in 2015 have, on average, tripled in price.

BCA Research says 125 million people now hold trading accounts – 16 per cent of the population, almost triple the level seen during the 2007 equity bubble. More than two-thirds of new investors don’t even have a high school education.


It is, as BNP Paribas is cautioning, a "self-feeding, leverage-fuelled, retail buying frenzy" – and it's not going to end well. Fear of 'garden variety' bears? The current US bull market is likely to end this year or early next year, according to a recent note from the Leuthold Group's Doug Ramsey, with a 25 to 30 per cent decline in store.

That sounds bleak, but it would merely represent a “garden variety” cyclical bear market, says Ramsey.

An average bear market could even be viewed as a “moral victory”; after all, the six-year bull market is the third longest and fourth strongest in history; it took place among “pure experimentation” in monetary policy; indices look moderately overvalued, while the median stock is severely overvalued.

Ramsey may be wrong. Société Générale recently estimated the probability of a 2015 bear market to be just 18 per cent.

The key point, perhaps, is that all bull markets end eventually. Bear markets feel unpleasant but they erase excess, tend to be relatively brief and are (usually) soon forgotten.

Continued gains would only "be followed by a bigger bust", says Ramsey. That prospect – another boom/bust cycle – is what investors should fear, not Ramsey's "garden variety" bear market. Hiding those bad earnings Companies like to hide bad news by announcing poor earnings when investors are less likely to be paying attention.

A new study, which examined more than 120,000 earnings announcements between 2000 and 2011, found earnings tended to be significantly worse when they were announced after market hours, on Fridays and on the busiest reporting days.

Ironically, the Friday trick backfires – savvy investors infer bad news is coming when they hear of a Friday announcement, and the stock sells off.

Underperformers are not the only ones watching the calendar. Companies that beat analyst expectations like to change their earnings announcement to “periods of higher expected attention to highlight good news”.

Is this pointless? Won’t any market mispricing be a transitory affair? Yes, but studies also show chief executives with strong reputations in the media benefit from better career outcomes. Publicising good news and hiding bad news won’t benefit the firm, but chief executives get to “enhance their reputations and career prospects”.


Buffett's waning performance Active investors point to Warren Buffett as proof that skilled investors can easily beat the market. However, even the world's greatest investor is finding that task harder than ever before.

Buffett's annual returns, as Ben Carlson from the Wealth of Common Sense blog noted, were a remarkable 23.3 percentage points more than the S&P 500 in the 1960s, and by 16.3 and 21.7 percentage points in the 1970s and 1980s respectively.

It has been trickier since then: Buffett’s annual margin of outperformance fell to 2.5 percentage points in the 1990s, 6.8 percentage points from 2000-2009 and 2.6 percentage points since 2010.

That’s stunning, but the relative decline is unmistakable. Size partly explains it – you can’t continue to trounce the market when you manage $350 billion – but so does the increasingly competitive investment landscape. That’s why 20 years ago, about 20 per cent of active funds delivered statistically significant market-beating returns, according to a recent study, compared to just 2 per cent in 2011.

Buffett's record proves two things: yes, top investors can beat the market, but doing so is getting ever more difficult. Who cares about fees? Investors' inattention to fees never ceases to amaze.

Last week, New York City comptroller Scott Stringer said local pension returns had surpassed expectations by roughly $2 billion over the past decade.

However, gains were almost entirely wiped out after fees were deducted, he complained.

That’s not the shocking part. During this time, fund trustees reported gross investment performance – the fees could only be found in the footnotes of funds’ quarterly statements.

Fees, some investors apparently believe, do not count. The mind boggles.