China, stock markets, power of information

WORLDWIDE, stock markets rest on a tripod of information, transparency and integrity. While transparency and integrity engender investor confidence, information drives the stock market. And such information could border on the fundamental, or technical, and sentimental.

The power of information on the stock market is immense. It can make or break. Recent developments in China stock market demonstrated the power of information and the media on stock markets. The People’s Daily, the mouth-piece of the ruling Communist Party published a forecast, to the effect that the then prevalent bull market was “just beginning’’.

The publication fired investors’ optimism and bullishness, and resulted to the injection of an estimated total of 4 trillion yuan of speculative margin funds into the market, as a result of which the Shangai Composite spiked from an existing high of 4,500 to 5,150 – a 150 per cent gain in a year, ironically, in the face of a slowing economy and weak corporate earnings. But at a threshold, a market correction started and investors’ optimism morphed into caution, and as the market shed 30 per cent in three weeks, investors freaked out, and started in a typical demonstration of the “herd mentality.’’ But the regulatory agencies and stakeholders rose in defence of the stock market through the evolution of a volley of remedial measures to arrest the sliding market and effect a rebound.

Stock brokers and Fund managers vowed to buy massive amount of stocks worth no less than 120 billion yuan (US$ 19.3 biliion) to help steady the market, and would not sell as long as the Shangai Composite remained below 4,500.

They were backed by China’s state-based margin finance company, which in turn, was backed by direct line of liquidity from People’s Bank of China (Central Bank), which, in addition, also cut interest rate for effect. There was also a freeze on Initial Public Offerings (IPOs).

Twenty-eight companies with IPOs in the pipeline voluntarily scrapped their plans and resolved there will be no IPOs in the near future. Again, the Peoples’ Daily wrote, “firm confidence instead of panic should be held for China capital market as market risks are within control and fragile market sentiment will be reversed.’’

In response, share prices of many state-owned companies including the biggest banks and industrial firms began to rally. Some gained 10 per cent in a day, the daily market limit even as the shares of oil and gas producer, PetroChina gained 27 per cent in four trading sessions. But as the market slide resumed, a concerned Chinese Prime Minister, called out to the regulatory agencies for better coordination of the remedial policy measures.

The development in China stock market is instructive in many ways. One, it demonstrated the power of information on investors’ sentiment and stock market mechanics.

Sentiment is a technical component of stock market dynamics, and research shows that the effect of negative sentiment or fear is three times the effect of euphoria on stock markets. Thus, the need for caution on the type and tone of information published about the market. The stock market abhors rumour, which is destructive, just as prognostication or forecast is hazardous, while disinformation, information opacity, misinformation and mismanagement of information fertilize crisis.

Also, in the canons of the stock market, use of privileged information to gain advantage in the market, known as “Insider Dealing,’’ constitutes an offence. Any material information on the stock market must be publicly available, same time, to enable all make judicious investment decisions. And such information must be timely, clear and precise.

Two, the China stock market gyration unveiled the importance and value China places on its stock market as a major factor in wealth creation and economic development. China has quite an army of retail investors which conduct around 85 per cent of shares transactions in the stock market. It is believed that the average Chinese investor has a fair knowledge of the mechanics of the stock market, its role in wealth creation and the associated risk elements.

Three, the collective effort of the government, regulatory agencies and stakeholders is a lesson in patriotism. They aggregated as a people to support their stock market. It is worthy of emulation by government and stakeholders in emerging markets. The role of the stock market in economic development cannot be overemphasised.

Research shows that “countries with more liquid stock markets enjoy faster growth rates of real per capita GDP over subsequent decades as they increase economy wide mobility of productive resources.’’ Four, the resolve by Chinese Stock brokers and Fund Managers to buy up massive units of shares to stabilise the market, speaks to the essentiality of effective market-making in our stock market, just as it brings to the fore the need for appropriate recapitalisation by broker-dealers.

The Securities and Exchange Commission (SEC), the apex regulatory agency in the Nigerian capital market is on top of the matter, but market operators are praying that the set minimum recapitalization be such that is ‘’appropriate’’, in view of the nature of stock broking business and the prevailing ‘’dear money’’ situation in the economy. It is believed that both parties will reach a fair compromise as regards the set limit and the effective time span, for the continuity and overall benefit of the securities market in Nigeria.

Five, in the lessons from China, is the issue of margin loan/trading. Though margin loan is a normal stock market practice which offers leverage to investors to play the market, it also encourages bubble as was the case in China. Margin loans can complicate things for the investor. If the margin trader is unable to meet margin calls and things go awry and snow ball, he is likely to record 100 per cent loss and still have the interest element to worry about and thereby be caught in a debt trap or peonage. It is often better for the risk averse investor to invest with money that will not result to complications should things not go as envisaged.

Six, and finally, cautious trading should be the guiding strategy in the stock market. Speculative trading may be a norm which gives verve to the market, but excessive emotional trading tends to drive share prices to their zeniths ahead of market fundamentals, after which the only way to go is down. But that, in any case, is typical of the cyclical nature of stock markets. And the good thing about bearish down times in the stock market is that it presents good opportunities for adepts to take position for the next bull run, which is one way people make cool millions in the stock market without breaking a sweat.

Ask Warren Buffet, the billionaire stock market expert. In the stock market, what goes down will come up, just a matter of time. And the cycle continues.

However, as the People’s Daily of China also noted, “continued effort should be made to ensure a long and stable development of the capital market.’’ That should be bottom line.

• Nwobu is Assistant Director/ Head, Research and Technical Department, Chartered Institute of Stock brokers, (CIS)