Hooray for bubble economics! The Shanghai Free Trade Zone has led to a substantial bump for all stocks with the word ‘Shanghai’ in their name, because investors don’t know what they’re doing any more than you do!
According to Bloomberg, since August publicly traded firms whose names include ‘Shanghai’ have added a total market value of around 275 billion yuan ($45bn) and outpaced the Shanghai composite index by a factor of five.
Quartz has some examples of the beneficiaries of this nomenclature-based form of investing:
[This includes] Shanghai Dragon Corp, an underwear maker and a taxi logistics firm, Shanghai Haibo—both of which will be outside the free trade zone—have surged 30% and 55% respectively since Aug. 22, when Chinese officials approved the free-trade zone. Shanghai International Port, a port operator that will be in the zone, has jumped 140% and Shanghai Material Trading, a metals trader, has risen about 25%.
The bubble-like nature of these gains is pretty clear even to finance outsiders, but here are some experts to back up the instinctive assertion that buying stocks because they have a certain collection of letters in their name isn’t a good idea:
Bank Julius Baer & Co. says the rally is unjustified because the government hasn’t announced details and any boost to profits may take years to materialize.
Andy Xie, the former World Bank economist who warned of a bubble in Chinese stocks in 2007 before the Shanghai Composite plunged a record 65 percent the following year, says the rally in free-trade stocks is another speculative mania.
“These concept stocks are of course a bubble,” [Xie says] “The free-trade zone will take a long time to develop and earnings will show only years down the road.”
Chinese investors “tend to be short-term oriented and overreact to good news,” Oliver Rui, a professor of finance and accounting at China Europe International Business School in Shanghai, said by phone on Sept. 12. “They are buying anything with the name Shanghai in front of it and remotely connected with the free-trade zone. This rally has gone too far.”
The stock market: where no one knows what they’re doing.