Friday, June 8, 2012

So You Want To Invest in the Emerging Markets

The Close of the Chinese Stock Market on Monday*

*photo courtesy of the Christian Science Monitor

China surprised investors and the financial world yesterday by cutting interest rates.

The cut - which is the first rate reduction since 2008 - is a clear sign that Chinese officials are more concerned about flagging economic growth than possible inflationary pressures.

Is this the beginning of an opportunity in emerging market equity markets?

The emerging markets have generally lagged the U.S. market this year. China's stock market, for example, is off about -1.1% year-to-date versus a rise of +4.7% for the U.S. market, according to Merrill Lynch.

However, if the Chinese central bank is adding monetary stimulus, might not some of the liquidity flow into the equity markets?

Well, it could be, in my opinion, and we are taking a hard look at all of the emerging markets, including China.

But I must confess that I was a little unsettled by what happened in the Chinese stock market earlier this week.

June 4 represented the 20th anniversary of the Tiananmen Square unrising.  For many Chinese, the brutal reaction of the Chinese government to the protest movement remains a very ugly memory.

So what happened in the Chinese stock market on this Monday, June 4?

Here's the report from Reuters:

The Shanghai stock market fell a bizarre 64.89 points on Monday, the anniversary of the bloody crackdown on protesters in Tiananmen Square on June 4, 1989, or 6-4-89.
In another twist, the Shanghai Composite Index .SSEC opened at 2346.98 points on the 23rd anniversary of the killings. The numbers 46.98 could be read as June 4, 1989, backwards.

If getting the index to settle on those figures through trades can be ruled out, could the trading system itself have been hacked?

Now, the Reuters story quoted several officials and experts that essentially said that it would have been exceedingly difficult for anyone to manipulate the indexes to achieve such a coincidental outcome.  And they're probably right.

But the fact that the possibility of a market manipulation event could have taken place on Monday is enough to give one pause.