- The Big Picture - http://www.ritholtz.com/blog -
Buy This Dip?
Posted By Guest Author On April 23, 2014 @ 6:00 am In Investing,Technology,Think Tank | Comments Disabled
Buy This Dip?
By Peter T. Treadway
April 21, 2014
The Innovation Economy begins with discovery and culminates in speculation… And so at each stage the Innovation Economy depends on sources of funding that are decoupled from concern for economic return.
Throughout the history of capitalism, financial bubbles have emerged and exploded wherever liquid markets in assets exist… The central dynamic is that the price of the financial asset is separated from any concern with the underlying cash flows – past, present or possible future – generated by the economic assets it represents.
William H. Janeway, Doing Capitalism in the Innovation Economy.
Instagram isn’t worth a billion dollars just because those thirteen employees are extraordinary. Instead, its value comes from the millions of users who contribute to the network without being paid for it. Networks need a great number of people to participate in them to generate significant value. But when they have them, only a small number of people get paid. That has the net effect of centralizing wealth and limiting overall economic growth.
Jaron Lanier, Who Owns the Future?
The Pause and Then Some
In my last blog entitled Time for a Pause? I expressed some misgivings about the excesses that were starting to appear in the tech/biotech sector. I wasn’t calling for a collapse of these stocks but a less dramatic “bump” in the road. Well, since then it has been quite a bump with the tech/biotech sectors getting hit on almost a daily basis.
I don’t have any idea how long or if this decline will continue, although I do not see a repeat of the devastation of 2000. A lot may depend on the current crop of quarterly earnings reports. Up until now, buy the dips has been the correct strategy, but this time the dip may be a little deeper. Allow me to make several points:
Valuation and the Hong Kong Shanghai ‘Through Train’
China has announced a revival of the so-called Through Train policy which would allow Chinese and Hong Kong investors to invest directly in each other’s stock markets. The Through Train concept had been promised several years ago and then dropped. The new policy does not kick in until next October and unfortunately it looks like the Chinese are going to screw things up with lot of restrictions and regulations. Still it’s an important step forward. Regulations can be changed. Restrictions can be dropped.
A true Through Train has the potential to be a very positive event for valuations in the Hong Kong stock market. Today it is illegal for a citizen of the People’s Republic of China to invest in stocks outside of China. Considering that China’s most efficient and best run private (as opposed to state owned) companies trade in New York and Hong Kong, this is a bizarre situation and one that I believe is a negative for valuations of Chinese tech stocks. Moreover, there are approximately 1.3 billion citizens of the PRC, many with excess savings looking for a place to go other than their current alternatives of overpriced housing, below market government bank savings rates, stocks of capital devouring state owned companies and risky shadow banking assets. The Through Train has to be a strong long run bullish factor for Hong Kong stocks.
This leads to a related subject—Hong Kong vs New York. Most of the best Chinese tech companies like Baidu and Sina have listed on either NASDAQ or the NYSE in New York. Only a handful of Chinese tech companies—Tencent and Lenovo being the most prominent examples—have listed on the HKEx. The US is preferred despite having to set up a convoluted ownership structure set up to get around Chinese laws, despite the fact that New York is geographically and time-zone-wise on the opposite side of the world from China, and despite the burdensome Sarbanes Oxley/ lawyer intensive legal environment in the US.
The apparent decision by Alibaba to list in New York is a big blow to Hong Kong. Actually a whole parade of Chinese tech stocks seems to be on tap for New York although the market’s recent setback has obviously rained on this parade. Still, it was beginning to look like Hong Kong was being relegated to being a regional market for low tech and state owned Chinese companies. Letting Alibaba “get away” was a terrible blunder on the part of Hong Kong. But Through Train if executed properly would be a game changer. It is only natural that the best Chinese companies would at least want to have dual listings, with one of them in a Chinese stock market. Through Train, much more than the 1997 political Handover to China, makes Hong Kong a Chinese stock market but without giving up its tradition of British law and the English language and no capital controls.
Will Hong Kong take advantage of this? And will the Chinese government really allow a legitimate Through Train to happen? To be seen. My guess is that if Mainland Chinese investors had a right to buy Hong Kong stocks unimpeded by Chinese government regulations and exchange controls, that Hong Kong would drive Chinese tech stock valuations, not New York.
Article printed from The Big Picture: http://www.ritholtz.com/blog
URL to article: http://www.ritholtz.com/blog/2014/04/buy-this-dip/
URLs in this post:
 Image: http://thedismaloptimist.com//var/www/vhosts/thedismaloptimist.com/httpdocs/wp-content/uploads/buy-this-dip.jpg
Copyright © 2008 The Big Picture. All rights reserved.