By HOWARD GOLD at Marketwatch
As I’ve written many times, China, Brazil, Russia and other emerging markets are suffering through secular bear markets that will last years. Since Chinese stocks represent more than 20% of some emerging-markets ETFs, the pain will likely continue well into this decade.
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Secular bear markets feature sudden, violent rallies and mini–bull markets that fool people into thinking they’re the genuine article. In real bull markets, indexes repeatedly top their previous highs; in bear markets, they never do.
So it was an ominous sign when Shanghai hit 5,000 and then reversed sharply. The previous all-time high was over 6,000 in October 2007. We thus have an eight-year down trend.
Back in 2007, China was booming as the government rolled out massive new infrastructure ahead of the 2008 Olympic Games, which by any measure were a huge success.
But after the financial crisis, the Great Recession and a domestic real-estate bust, China is struggling to hit the government’s 7% economic-growth target. When the property market crashed, desperate Chinese authorities encouraged novice investors to channel their speculative energies into the stock market.
Now that’s reversing quickly, as massive margin calls swamp the government’s efforts to stop the rout.
The underlying problem is that while the Chinese economy has made great strides and become a global powerhouse, China’s investing culture remains backward and immature.
As John Mauldin wrote in his “Thoughts From the Frontline” e-letter this week: “Chinese individual investors are not primarily ‘value’ investors. Sky-high valuations don’t seem to faze them. They are primarily momentum investors who buy whatever is moving and sell whatever is falling.
“According to my friends who go to casinos and watch the Chinese gamble, they tend to jump on a ‘trend’ such as red coming up on the roulette table repeatedly — never mind that the odds are only ever 50-50. Red is seen as hot and therefore the way to bet. That carries over into trading styles. …”
When highly unsophisticated investors run into trouble, they panic quickly and try to get out at any price. The same inexperienced bettors who drove Shanghai up to 5,000 will take it way down, maybe to the last bear-market low above 1,700 — or maybe even lower, to 1,500, before it finds a long-term bottom.
When Shanghai was peaking at 5,000 in June, I gave you five words of advice: Get. The. Hell. Out. Now.
To which I’ll add five more: And. Stay. The. Hell. Out.