Will A Chinese Stock Market Crash Drag Down The FTSE 100?

I painfully remember when the NASDAQ, the US index for technology stocks, peaked at the height of the dotcom bubble. It went on to by crash by close to 80% and it took nearly 15 years to once again attain similar levels. During the heat of dot com fever, NASDAQ stocks had been on an average P/E of around 80.

Surely nobody would be so stupid as to push tech company shares up so high again, would they? It appears they would, over in China. The Economist pointed out recently that the Shenzen Exchange, which is China’s tech stock equivalent, is sitting on a trailing P/E of 64. And the country’s ChiNext index for startup companies has reached a P/E of nearly 140 — and there have even been directors warning about hyping of their companies’ shares.

Tell your mates

Just like here in the West, when everyone was jumping on the “get-rich-quick” bandwagon and talk of the next hot tech stock replaced pub conversations across the country that had previously been about football and telly, retail investors in China are rushing to open trading accounts and get stuck in. Oh, and a lot of the cash is coming from people who’ve previously made a mint in an overheating property market — and something seems strangely familiar about that too.

There really is no question of whether the Chinese stock market is heading for a bust — it is, without a doubt — but we just have no idea when. When the Western bubble burst in early 2000, there was no obvious change that triggered it. All that really happened was that people started to notice what had been under their noses for quite some time.

Oh yes!

There was, they started to realise, no way that those tech companies could all make enough profit to justify their sky-high valuations. Quite a lot, in fact, were actually a bit short of cash and had no earnings in sight, and it was inevitable that some of them were even going to go bust rather than all turning into new Microsofts.

The big questions for us now, given that we can’t hope to guess the timing, are how badly will Western markets be affected when the Chinese crash happens, and should we get out of shares just to be on the safe side?

In reality, the Chinese crash shouldn’t hurt the Chinese economy as much as the dotcom crash hurt the UK and US. China’s publicly-quoted companies still account for a relatively small portion of the overall economy, and “safe” shares like banks are still on relatively modest ratings in China.

Here in the West, the FTSE 100 is on a P/E of around 16, with even the NASDAQ only rated on a trailing multiple of about 23. And the Hong Kong market, to which a number of our companies is exposed, is valued a good bit more conservatively than mainland China.

Don’t panic

So no, we shouldn’t panic. We should just keep on looking for those long-term good-value shares, and keep taking the dividends.

Sticking with that approach can bring great long-term rewards.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.