Mark Mobius says Chinese stocks have risen too fast after a world-beating rally sent the benchmark Shanghai Composite Index to its highest level in seven years.
A 20 percent retreat is “very possible,” Mobius, who oversees about US$40 billion as the executive chairman of Templeton Emerging Markets Group, told reporters in Hong Kong.
The Shanghai Composite Index rose 0.8 percent at close at 3,994.81 yesterday after briefly surpassing 4,000.
The index has climbed 90 percent in the past 12 months, the most among 92 global benchmark measures tracked by Bloomberg.
While Mobius says the bull market in Chinese stocks is “intact,” he is turning cautious in the short term after investors opened a record number of new stock accounts and increased margin debt to all-time highs.
Chinese shares are unlikely to gain entry into MSCI Inc indices this year, limiting demand from international investors, he said.
“It has gone a little too far and too fast,” Mobius said.
Chinese investors opened a record 1.7 million accounts to trade equities in the week to March 27, while there is now more than 1 trillion yuan (US$161 billion) of borrowed cash riding on the market.
“Too much credit is not a good thing in the long run,” Mobius said. “When the market turns, it could be a problem.”
He is avoiding buying Chinese shares through the Hong Kong trading link due to “restrictive” rules on share ownership.
“According to Chinese regulations, the titles pass to the custodians in China and our custodian banks refuse to allow that,” Mobius said. “That’s a problem. I don’t see how this can be resolved. The Shanghai connect won’t work unless they revise regulations to allow foreign custodians to keep possession.”
Foreign funds sold a net 2.2 billion yuan of Chinese equities through the Hong Kong trading link yesterday, the most on record.
China is the biggest weighting in Mobius’ Asian funds, followed by India and Thailand.
Mobius said he favors banks on the outlook for financial reforms, as well as auto and technology stocks for their growth prospects.
“The bull market is still intact,” he said. “It can go for five years to 10 years.”
The ultimate inclusion of Chinese shares in MSCI global benchmarks together with the liberalization of the capital market would provide the Chinese market with incentives to climb further in the long run, he said.
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