Financial Professionals

Market Insights

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Commodities-China

08/21/2009

Significant attention has been paid over the past few days to the tepid performance of the Chinese equity market during the month of August. Incorrectly, this is being portrayed as an indicator for the direction of our domestic equity market. Understand that what was the stabilizing force, domestically and globally, during the winter of our discontent was the Chinese economy, not the equity market.

The Chinese equity market is an immature market, absent of a side-by-side derivatives market, absent of a mature fixed income market, and, most importantly, operating with significant government imposed restrictions. Also keep in mind the extreme speculative nature of the Chinese equity market, as highlighted by the overwhelming number of IPOs this year. So far they account for 51% of the total global IPO volume versus a 5 year average of around 15%. It is not surprising that the largest global IPO year to date, Chinese State Construction Engineering Co., a $7.3 billion dollar offering in late July, signaled the top in the Chinese equity market.

Regarding China, the economy, the stimulus package, and the commitment to build and raise the standard of living domestically are the important things to consider. Look no further than its effect on resource and commodity prices. Much will be made about rising oil through the fall of 2009. Yesterday's oil report showed a significant shift in working-off existing inventories. A majority of that supply removal comes from China's industrial usage.

The power of China is not measured by its equity market, but by its impact on the global economy. That certainly is validated by China's 30% contribution to global consumption growth. As former President Clinton said in 1992, "It's the economy, stupid."

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.