tag:blogger.com,1999:blog-8152901575140311047.post181999014484283842..comments2024-03-28T08:49:51.975-04:00Comments on Musings on Markets: Beijing Blunders: Bull in a China Shop!Aswath Damodaranhttp://www.blogger.com/profile/12021594649672906878noreply@blogger.comBlogger17125tag:blogger.com,1999:blog-8152901575140311047.post-17707409961384117832015-09-10T15:01:02.894-04:002015-09-10T15:01:02.894-04:00Hi Professor, China has controlled interest rates ...Hi Professor, China has controlled interest rates but it is now on the path of liberalization. The cheap money - pre 2008 was used to roll out infrastructure - post 2008 its infrastructure spend was inefficient (bridges to nowhere) as it panicked and inadvertently bailed out the global economy. <br />Yes state control is all pervasive but are the markets not discounting it already. Bank stocks implied COE in the DDM model is 13 to 14%. <br />Yes consumer stocks are expensive but seems justified -The wage increases in China of 12 % pa over the last few (another step in the right direction) support the retail sales (still growing in double digits). <br />Anonymoushttps://www.blogger.com/profile/17562234777475045977noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-9756235727615499162015-09-08T19:14:56.063-04:002015-09-08T19:14:56.063-04:00Hey professor Damodaran,
I have one question abou...Hey professor Damodaran,<br /><br />I have one question about your capitalization of R&D.<br /><br />Should we make the same adjustment when companies report in IFRS (they expense Research and capitalize Development expenses)<br /><br />Great week,<br /><br />Marcos B.Marcos B.noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-59142006476820530832015-08-25T02:43:19.360-04:002015-08-25T02:43:19.360-04:00Thanks Prof. For the insightful post. As the globa...Thanks Prof. For the insightful post. As the global financial markets getting closer and closer. One crisis could trigger a global panic as it is happening now, so it is essential understand the magnitude and the nature of the Chinese financial meltdown.<br />Another interesting thing. Is how to update the valuation of stock like AAPL, YUM, NVDA etc. since all these companies have big portion of their revenue, margins and profit coming from China?<br />Is the latest valuation of AAPL worth a revision? And how to do it?Anonymoushttps://www.blogger.com/profile/08052085713847073275noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-22653940578933434912015-08-24T13:18:28.886-04:002015-08-24T13:18:28.886-04:00Sir - An unrelated (to China) query....why do peop...Sir - An unrelated (to China) query....why do people look at EV/EBITDA. Is it not more apt to make the denominator in sync with the numerator and hence use EV/EBIT. Even you have referred to EV/EBITDA in this China rant! Am I missing something? Pl clarify the funda.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-7919843078836185062015-08-23T17:56:34.475-04:002015-08-23T17:56:34.475-04:00Michael,
Michael, I sympathize with you but don...Michael,<br />Michael, I sympathize with you but don't agree. You seem to be arguing that young portfolio managers and retail investors cannot be trusted in markets, because they are uninformed and greedy. Are you suggesting that institutional investors, in general, and older investors, in particular, are less greedy and more informed? That has not been my experience, but even if I accept your stipulation, I am not sure that a group of 65-year old party faithful in Beijing is any less greedy or any more informed on economic matters. Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-32033512662872179742015-08-23T17:55:13.491-04:002015-08-23T17:55:13.491-04:00Equity Analyst,
I disagree with you on the Fed con...Equity Analyst,<br />I disagree with you on the Fed controlling rates, but even if you believe that governments in other countries try to control markets, Beijing is in a class by itself in exercising absolute control. And what exactly happened in India before and after imperial control? It was a slow-growth, bureaucratic mess before (and you could blame the British) and it was a slow-growth bureaucratic mess after (and you could blame the Fabian socialists who ran the country with their five-year plans and experts who knew it all). I don't think that financial markets were part of either story.Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-17513502374041612662015-08-23T15:27:16.842-04:002015-08-23T15:27:16.842-04:00Professor,
Thanks for a great article. Do you fe...Professor, <br /><br />Thanks for a great article. Do you feel that the US valuation metrics that you are using for comparison are understated because we are not factoring in the full impact of M&A writeoffs and stock based compensation (a topic on which you have written great papers). You see so many American companies touting their strategic purchases of $5 to $15 billion with great fanfare and four years later these acquisitions are written off without any hits to the income statements. I don't have hard numbers on these but my hunch is that American companies are far more active on the M&A and stock based compensation front than some of their Asian counterparts. ThanksAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-1115241279384275032015-08-23T01:27:20.246-04:002015-08-23T01:27:20.246-04:00Hi Professor, I also agree on your points as an in...Hi Professor, I also agree on your points as an investor. But, I think this is a highly debatable thing when it comes to China and its interference in the market mechanism. However, the extent of interference may be different in China compared to the US. But, even in the US the Fed has been controlling the interest rates, interefered in the markets when the crash happened. They did not just let the free market to decide it all. For instance, even in the markets there are circuit brakers etc which will stop a sudden crash. (No one is just waiting and seeing until free market decides the outcome!)Look at the incidents of AIG, GE in the aftermath of the GFC. Even in that period, market deregulation has been blamed and the success before that was attributed to the free market. Further, it is also widely known that the playing field is not fair for everyone. For instance, all three entities WB, IMF and WTO have had their ways of interfering in markets and by and large these are controlled by US and the main players. Even when it comes to corporate governance, some of the largest entities like Facebook have not got it right. Further, about different classes of shares, Google has it. I think it is not so different in EU or elsewhere. I think this Free Market thing is the Potemkin Village in that respects. So, if the governements did not intervene those countries will be facing immense hardships. Look at Greece now. (it's a different debate altogether). <br /><br />Hence, as political beings it is very unfair to expect one to be fully open and accept free market without hesitation. (given how the things have evolved). Look at India and what happened to them before and after imperial control. so it is normal for anyone to be skeptical and behave accotdingly. <br /><br />As you mentuoned, therefore (not as political beings) as investors we have to realize these anf behave admitting the realities.Anonymoushttps://www.blogger.com/profile/13501694437058975962noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-70902469694154185192015-08-22T17:05:48.445-04:002015-08-22T17:05:48.445-04:00Professor,
First I'll give Chinese government...Professor,<br /><br />First I'll give Chinese government a lot of credit for the country's growth in the last two decades.<br /><br />The fundamental problem of China's financial market is the quality of investment management cannot catch up with the explosive demand increase due to household wealth growth.<br />While institutional investors dominate the US market, retail investors generate 85% of the trades in China's stock market. The average age of public fund managers are below 30. They couldn't get trusted for the lack of experience and lower integrity. With such a market, it's absolutely true that most investors only knows about "pricing" but not "value". However, if the government doesn't exert excessive control, most retail investors would eventually lose to a small fraction of elite investors. They will never let that happen, particularly if the majority of winners are not from domestic.<br /><br />I don't quite agree that the China government discourages short-selling activity. On the contrary, the government has been gradually opening its market by all means. Many trading strategies and financial products have started to be allowed in the market since last year. Unfortunately, most investors, even professional fund managers, don't have enough expertise. The recent market crash is all because of the misuse of leverage, on both institutional level and retail level.<br /><br />Comparing to western market, China's stock market is a toddler. So it raises a lot of debates about how the government should guide the market. What we experienced in western economy might not be correct or the only way to cure China's problem. Meanwhile, it will take time for China's asset management industry to get matured and trusted.Michaelnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-44694179032446028492015-08-22T12:57:30.981-04:002015-08-22T12:57:30.981-04:00Kpl,
You are right. It is not just the Chinese gov...Kpl,<br />You are right. It is not just the Chinese government that views markets as morality plays, but no other government controls the levers of commerce, policy and government as much as the Chinese government does. But I will do a broader post on the false divide between good and bad investors.<br />Sendhil,<br />I am genuinely puzzled when you disagree with my point that Indian investors are restricted from investing outside. Let's say that you are reading my posts in Chennai and on an off chance, agree with me on Twitter and Facebook. Can you buy a thousand shares of TWTR or sell short on FB? (You may be able to invest in Indian mutual funds that hold foreign stocks but that is a very limited definition of investing outside India.)Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-72067981603624718762015-08-22T10:01:18.597-04:002015-08-22T10:01:18.597-04:00Dear Damodaran,
I relished your in...Dear Damodaran,<br /> I relished your insightful article on the Chinese markets. But the point that you have made on India ie. Indian Domestic Investors are restricted from investing outside India is not true.<br /><br />A request from me would be to get your views similar to this blog on how you perceive Indian markets and its projection as the fastest growing market in the world. Sendhil, PenguWINhttp://penguwin.comnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-44657424348070899282015-08-22T03:00:44.931-04:002015-08-22T03:00:44.931-04:00"By restricting where investors can put their..."By restricting where investors can put their money, treating short sellers as criminals and market drops as calamities, the Chinese government"<br /><br />This gets my goat always as it implies that only Chinese government only does it. Every country does it.<br /><br />Did the western world not treat short sellers as criminals in 2008 and whenever markets drop do the governors at the Fed (who incidentally are trying to control the economy in their own way - condescending since highly educated way-- can be called as meddling with unintended consequences) not come out in droves as if market drop is a calamity, change the accounting norms from mark to market to mark to whatever you like. More over this is sold as if it is not done it will be worse, it is for your good etc. Basically fool people and keep them under an illusion. <br /><br />My point is that western world does it too, may be not in the ham-handed manner as the Chinese seem to be doing now. BTW, I am not a fan of the Chinese.<br /><br />That means strip the whole thing of sophistication, everyone does the same thing with the same intention -- extend and pretend, kick the can, make belief, name it what you will. They are all wolf in sheep's clothing -- bent on cheating people, on the assumption they are cretins. They are all Goebbels - sophisticated or otherwise, western or eastern.<br />kplhttps://www.blogger.com/profile/11270590963692578366noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-36540419876233508582015-08-21T23:17:06.230-04:002015-08-21T23:17:06.230-04:00The real economy may not be a Potemkin village, bu...The real economy may not be a Potemkin village, but the financial markets are, to some degree. The financial markets are sort of like a 13-year-old 7 foot tall Yao Ming, size of US in the 1980s, maturity of the US markets in the 1890s. For US listings, there's the whole VIE nonsense, which seems technically illegal and what one actually owns seems questionable. Ultimately there are no means for shareholders to exercise control, or ensure that they participate in a firm's success. Shenanigans are common. Financial statements can be inaccurate. Management can loot, with little recourse. A company which is a national champion today can sometimes be in the government's crosshairs tomorrow, e.g. Weibo Vs. WeChat. There is no Western style credit analysis for bank loans or bonds, or value analysis of stocks. It's all just speculation on what the government will pump up next. Banks are funded by financial repression, ie there is no where else for locals to put their savings, and real interest rates are negative. Banks then lend at the government's direction. There is no legit risk capital - you want to start a business, you either get a government or foreign sponsor, or turn to the shadow banking system. And if someone in the state owned sector decides they want to muscle you out, there's a good chance you are out of luck. Caveat emptor ... at some price, a Chinese stock might provide a dividend, some value cushion, and an option on growth, if it happens, the powers that be decides to let you share in it, and perhaps one day markets mature. But I wouldn't bet on it before a massive blowup.CurmudgeonlyTrollhttps://www.blogger.com/profile/02004282752334460717noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-28217051002613444422015-08-21T22:46:26.333-04:002015-08-21T22:46:26.333-04:00Hi Mr. Damodaran,
Do you think China would be ba...Hi Mr. Damodaran, <br /><br />Do you think China would be back to investment and export-led growth model compared to the domestic consumerism model it was seeking on attaining? And when you were valuing Vale and Lukoil back in April, did the China effect create some bias in your valuation or did you you assume other countries would pick up the slack when China isn't consuming commodities at its historic rates.<br /><br />Thanks<br />TimAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-73613139374587333832015-08-21T21:36:49.198-04:002015-08-21T21:36:49.198-04:00Thanks for the article. If you divided up the univ...Thanks for the article. If you divided up the universe between international (Nasdaq/HK) and domestic, the difference in valuation would be a lot more pronounced. HK has a market PE multiple at 9x, so it drags down your overall China multiple. Not saying that the HK market is cheap though, as that multiple is dragged down by PRC banks trading at 5x PE (with a E that is more likely than not understated), but that's a completely different topic.<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-53928221420210585032015-08-21T15:20:08.687-04:002015-08-21T15:20:08.687-04:00Just a minor factual correction, Aswath, but the g...Just a minor factual correction, Aswath, but the grouping of emerging economies you refer to is now known as "BRICS" since it includes South Africa (joined in 2010). As a South African, I'd be remiss not to point this out. ;) Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-81205053978703577662015-08-21T13:07:28.724-04:002015-08-21T13:07:28.724-04:00Thanks for the article Aswath, I completely agree ...Thanks for the article Aswath, I completely agree with your conclusions. I believe the benefits of a free market economy outweigh the negatives of the occasional "bubble burst" or downturn which a natural part of the stock market life-cycle. If the Chinese got on board with this rationale, it would open their economy to a whole new range of "investors." Also, I agree that they need far better corporate governance - maybe bring in some western models - independent board of directors, no related company transactions, etc. Anonymousnoreply@blogger.com