A lack of investment opportunities and easily obtainable credit from underground lenders have caused the Chinese stock market to rise and fall rapidly.
Chinese stocks entered a bear market and have fallen 30% since mid-June after hitting a seven-year high.
‘People who have money would let others aged 25-35 leverage up to four times or even more to trade stocks. The margin borrowing basically exaggerated the market moves, the magnitude and the speed on both the rally and the correction,' she said to Citywire Global.
She added that people who have borrowed through unofficial channels have been wiped out, and this is the reason why the rally and fall was so fast as many of the speculators were forced to liquidate their positions.
‘The rally started because of a lack of investment opportunities. The fixed income option does not exist. Property investment and gold investment are out of favour.’
Cortesi believes the domestic Chinese A-share market is a challenge and retail investors may have a negative impact on it.
‘The A-share market is almost impossible to predict. You are either 50% too early or 30% too late when you try to find the peak.’
‘When the price drops, people panic and they sell more. When the market is going up people see their friends making money and they jump in. They completely ignore the fundamentals of the company.’
Small cap bubble
Cortesi admits that she didn’t see the crash coming but can still find value in the market. ‘Retail investors don’t like blue chips, because they are considered boring. They like stocks that can go up 10% in a day. We see some of the blue chip stocks in the A-share market that are quite attractive because of this dynamic.’
She said that, in her view, the small cap space is already in a bubble-mode as its valuation is very high. ‘It’s quite difficult to predict where the bottom is and when it could reach the bottom, but I wouldn’t say the bull market is over.’
Fear and greed
The manager thinks that those who missed out on the rally could help the market to bounce back, especially as the government has cut interest rates.
‘The people who hold the biggest pool of savings tend to be the 35-50 year olds. The total savings rate is as high as 50% sitting in cash.’
‘I think people who still have a large pool of savings and are out of the market could potentially go in. When they go in, they are less speculative. It is pretty much the only asset class that could give you a good return. The fear and greed factors are at work.’
Over the past year to June 2015, the Julius Baer EF China Evolution fund returned 59.36% in JPY terms. This is while the MSCI China NR index rose 50.52% over the same timeframe.