China Pessimism Bubble: Stock Market Shanghai - Ripe For A Price Explosion?

(Drivebycuriosity) - It`s getting more and more clear, China´s economy is gathering speed again. Yesterday we learned that the service sector in China accelerated its growth in October. A non-manufacturing Purchasing Managers’ Index (a gauge for the growth of the service sector) rose to the highest level this year, reported Bloomberg (bloomberg).  Last week we also heard that China´s manufacturing sector grew faster in October. Recently we also got strong growth rates for China´s retail sales & the industrial sector (driveby).

But China´s stock market doesn`t reflect this strength, quite the opposite. The Shanghai Composite Index, a benchmark for China`s stock market, lost around around 5% year to date and is hovering around 30% below its temporary peak from July 2009.

China´s stock market is still trapped in a pessimism bubble. For years 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"  (driveby). Recently JP Morgan joined the crowd of China bears and 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. They all are focusing on some structural problems and ignoring the ongoing strength of the broad economy.

I believe that this ignorance creates ample opportunities for patient investors. I suppose that the flow of good news will continue, because China´s economy is getting stronger again. Better economic data could break the stubborn negative sentiment for China stocks and the pessimism bubble would finally pop.

In this case the Shanghai Composite Index could repeat its temporary rally from 2009. According to Bloomberg, the Shanghai Composite Index then doubled in 10 months through August 2009 (bloomberg). 

Maybe the Shanghai stock market is ripe for a price explosion.