China’s stock markets present to investors what Charlie Munger might describe as a ‘turds and raisins’ proposition. There are some good companies; but they’re mixed in with an awful lot of, often very big, duffers.
Prior to their lift off last year these markets were startling underperformers (and, after their return to earth, remain so) both relative to underlying economic growth and global peers. Was/is this performance though due to systematic undervaluation or are there features peculiar to the China stock markets, and by implication the firms listed there, that account for this multi-year disappointment?
The paper I’m highlighting this week is a data drill tour-de-force by Franklin Allen et al from the Wharton School that has cross compared 86-markets, looking at over 75-thousand companies listed on 89-exchanges from the year 2000 to the year 2012 and, as this is a summary, I’ll get right to the point.
The serial listing of shabby (mostly SOEs) companies that, more cynically than anywhere else in the world, pump ‘n’ dump performance into and out of the IPO process is one of three major problems (see the chart for ROA into and out of the listing process on P. 32 for a shocking picture). The other two being the absence of (any?) a robust de-listing process and finally corporate governance issues relating to information disclosure. [I’d also throw in here an absence of shareholder engagement (a blight all across Asia) just compounds the above.]
It’s not all bad news. Raisin pickers, both in China and Asia, can and do do well; but index-aware operators, by far the largest single institutional investor group, are condemned to a much less appetizing diet. Their clients should take note.
The paper in full, with some handy charts at the end, can be accessed via the following link Explaining Underperformance.
Happy Sunday