China Pessimism Bubble: Strong Numbers, Weak Stock Market - How Long Can This Go On?

(Drivebycuriosity) - This morning we learned that China´s economy is getting stronger. "China’s manufacturing strengthened more than anticipated this month, a sign the recovery is gaining momentum", writes Bloomberg (bloomberg). "The preliminary 50.9 reading for a Purchasing Managers’ Index released today by HSBC Holdings Plc and Markit Economics shows an acceleration compared to final reading from September (50.2). Readings above 50 indicate expansion".

But China´s stock market ignored the good news, as usual, and stocks dropped anyway. Today the Shanghai Composite Index, a benchmark for China`s stock market, declined 0.9%, the 3. negative day in a row. Bloomberg writes that the manufacturing report was overshadowed by concern that the government could tighten credit and clamp down further on the property market.

Last week the index lost 1.5% (minus 4.6% year to date), ignoring that China’s economy accelerated to an annual rate of 7.8% in the third quarter and industrial production advanced in September by 10.2 %,  while retail sales gained 13.3%.

This ignorance shows that China´ stock market is sticking in a pessimism bubble (driveby). The stock prices are reflecting the continuous pessimistic sentiment and not the fundamentals. China bashers like New York Times correspondent Paul Krugman and Jim Chanos, a hedge fund manager and notorious short seller, have been banging the "China crash drum" for years (driveby). Last week JP Morgan had cut China to underweight. According to the China crash callers, China is suffering from huge structural problems like too high debts and too huge investments into real estate which would cause a "hard landing" of the Chinese economy. The majority of fund managers and other professional portfolio managers seems to believe. 

But the pessimism bubble creates a huge opportunity for investors. As every bubble it has to pop sometime.  The gloomy sentiment has been depressing stock prices. I reckon that the extremely low valuation and the backlog compared to the US and European stock markets, which are close to all-timehigh, are an invitation to invest in Chinese stocks.