For those who have been following Asian markets for some time, Taiwan and China are looking awfully similar.
Back in the late 1980s, the stock and futures markets in Taiwan were highly driven by mom-and-pop investors.
Property prices climbed and stock prices shot up more than tenfold to a record high in early 1990, thanks to credit expansion and financial deregulation.
Then, the government imposed stricter credit controls to cool down the markets, sending the stock market plunging nearly 80% in September 1990.
It isn’t any easier to navigate the topsy-turvy world of Chinese markets these days, Edward Misrahi, founder and chief investment officer of Ronit Capital, told Raoul Pal of Real Vision TV.
“The market reminds me – when we’re both at Goldman in the ’90s – it’s a little bit of Taiwan. Retail crazy market. Crazy, I mean, literally. You probably heard of all these things that happened in the last few months regarding the futures on, I don’t know, eggs, all kinds of things. I mean, it’s just mind-boggling what happens. As a result of that, as an investor it’s a tricky environment to invest when you can get caught in manias, up and down, driven by things that you have no relation to. Because no one can understand the average retail investor in China. And you know what happens in China – it’s like 6 million retail investors decided to buy this thing.”
These retail investors seem unperturbed by the roller-coaster ride in the markets, and still have a “want it all” mentality. That is to say, they want high returns but without any of the risk. That isn’t possible.
While there are some gloomy predictions out there, Misrahi thinks that China will muddle through.
Here he is again:
“We think that countries get in trouble when there are two particular big weaknesses: a system that doesn’t allow financials to unleash, which unfortunately China has a little bit of that because of the currency. We think that the more they relax capital controls, the more likely they’ll have a crisis. My guess is they aren’t going to relax capital controls that quickly, because they don’t want to lose that ability. What they don’t have, the financial sector, although their NPLs are much greater than what they report, they still have a very profitable banking system. Which means that as long as they don’t have to mark to market tomorrow, they can continue to little by little clean up the system over time. We think they can muddle through.”
Misrahi was a partner of Goldman Sachs in New York before he cofounded hedge fund Eton Park. He then left the firm to start Ronit Capital, a London-based firm that focuses on emerging markets.