Chinese loan growth in June was faster than expected. Again. This not only brings the year-to-date figure to RMB7.33tn (or more than 20% of China’s expected GDP this year), but 30%+ yoy lending growth occurred in the face of repeated admonishments from China’s bank regulator (the CBRC) that loan growth over the past few months was quite fast enough already. In many parts of China property sales have long exceeded previous record highs set in 2007. Private sector construction activities have also seen a strong restart in recent weeks. Has China reflated the economy so much that it is time to watch out for signs of tightening in China?

Initially, warnings from the CBRC were the only signs in China that tightening might be considered, but they have since been joined by a chorus of mid-level officials questioning whether the torrid pace of China’s current fiscal stimulus might not lead to wasted investments like “bridges and roads to nowhere”. Most importantly, the PBOC has recently begun to step into the market to mop up liquidity, most recently by issuing 1-year PBOC bills for the first time since October 2008 in an amount theoretically equivalent to a 25bps hike in the reserve requirement ratio (at a time where China’s excess reserves are already much depleted). » Read more: Jeff Coggshall – June 2009

After five decades, the Institute for Financial Analysis has polled its members, who now no longer believe in efficient markets – or, more specifically, that share prices do not reflect all available information. Does this mean an end to the random use of Greek letters in financial jargon? What should a rational investor do without his trusty Capital Asset Pricing Model? Is the DCF dead? How can one function in these volatile times without a simplistic framework?

We view this apparent mass epiphany as arrant nonsense, verging on sacrilege. The world is awash with financial information, dispensed with formidable rapidity to a very wide audience by Bloomberg, Reuters, CNBC, email and even Twitter for those of a trendier persuasion. CEOs cannot scratch their noses without it being made public and any informational advantage that an investor can claim is likely to be either fallacious or illegal. Where the academic fraternity has gone wrong is in assuming that all participants interpret new news in the same way. This has never been the case and it most certainly is not now. Investor psychology will always influence how news is reflected in market pricing and at times of panic and extreme bullishness will twist data to extraordinary degrees to suit current positioning. Just look at the changing response of markets to capital raisings over the last six months. These episodes are always the most fertile for active investors who can adopt some degree of objectivity in their process. The ‘art’ of fund management is simply discerning the balance between what type of economic outcome is reflected in stock prices and what is likely to eventuate based on history or other guides – and one must always be cognisant of the old adage that history may not repeat itself, but it does tend to rhyme. The panic of last year was an unpleasant episode to go through but sowed the seeds of huge pricing anomalies. The aftershocks of the financial crisis are likely to continue to provide a lot of opportunity to add alpha over the next six months. » Read more: Mark Fleming – June 2009