Tuesday, June 28, 2011

Standard Chartered and the Property Market in China





Standard Chartered $STAN gave a bullish trading statement today and the market received it warmly, however the share price move looks to be a blip in a pronounced downtrend


I suspect the main reason for this is that investors have been pricing in a slowdown in Asian growth following tightening measures by China. In addition, the knock on effect of a temporary slowdown in industrial production following the disaster in Japan has scared investors. So is Standard Chartered a stock worth buying?

Is Standard Chartered Worth Buying?
I think not. Turning to the Standard Chartered statement, it seems quite positive...
“Standard Chartered is on course to deliver another strong first half.  We anticipate delivering cost growth broadly in line with income growth for the first six months of 2011. The credit environment remains benign across Asia. We are advantaged by a very strong balance sheet which remains highly liquid, very well capitalised, diverse and conservative; and are capturing increasing levels of business from our markets across Asia, Africa and the Middle East. "

...however, if we look into Standard Chartered said about regional performance, there is a red flag waving here...
“Sources of income growth remain well diversified, both by product and geography. Whilst income in India is lower than in the first half of 2010 and growth in Africa has been muted, this has been more than offset by very strong performances in Hong Kong, Singapore, Malaysia, MESA, China and Indonesia.”
...and the continued strength of Asian credit expansion is supported by other evidence. In normal circumstances, this would not be a matter for concern however China has been consistently raising reserve requirements in order to tame domestic demand and commodity price inflation.  The good news is that commodity price pressure is abating...


..but it is not clear if this is the start of a gently managed moderation or the beginning of a prolonged crash. The former would be good news for Standard Chartered but the latter would be damaging.

Anthony Bolton on China
It was interesting to read what top fund manager Anthony Bolton of Fidelity China Special Situations said recently concerning inflation and property prices in China. For example on inflation...
“I would not want to say that inflation is not a problem but I do not think it will stop the bull market unless it gets completely out of control. The authorities must tread a delicate path between slowing the economy to alleviate inflationary pressures and suppressing growth too much but I believe they will strike the right balance. I am expecting growth to fall back to 7-8% compared with last year's 10%, but that is still a very attractive level relative to the developed world.”

On the property market in China, Bolton cites the reports of empty cities and the speculation over 65million empty apartments. However, he concludes that the mortgage debt held against the properties is not high so he feels the long term picture is ‘very favourable’.

I’m not so sure and I think a cautious approach should be taken here. The good news is that the Chinese Government has the reserves to stimulate the economy if there is a sustained slowdown in housing. However, if there is a crash, China related equity investors-particularly with the US housing crash in their minds- won’t be slow to price this in negatively.