Investors shouldn't bet on concept stock

In a market where confidence is in short supply and uncertainty has become a fixed feature, many investors are turning to the occult, banking their hopes on the mythical magic of so-called concept stocks.

Even though the myth surrounding these concept stocks has been blown time and again, there is no shortage of stock market punters willing to bet big money on nothing more than a hunch. Such a speculative mentality is a major force in a stock market that has been searching in vain for its direction for a while.

During that time, stock market fundamentals have largely been ignored and economic realities distorted to suit the whims of the big market players. The latest craze, whipped up by the hoard of gullible commentators and dubious investment experts, involved stocks that were supposed to benefit the most from the free trade zone in Shanghai, as well as those free trade zones that are supposed to be in the pipeline at Tianjin, Xiamen and some other coastal cities.

There must be investors who have made money from the yo-yo price performance of such stocks in the past few months. But most investors who bought the shares based on the hype have been left scratching their heads wondering why the prices of many free trade zone concept shares have plunged back to earth.

It's important to understand that concept stocks are driven entirely by speculation and herd instinct. It's rash to buy the shares of a company simply because it happens to be located in a free trade zone or involved in a related business, such as logistics or trading.

Many investors who rushed to buy concept stocks paid little regard to the capabilities of the companies to capitalize on expected changes in the business environment. Past experience has shown that not all companies can survive a major economic restructuring. Those that fail to adapt do worse despite the many opportunities a restructuring might have promised to bring.

There has been much talk in the local media about restructuring dividends. What the commentators failed to note is that the dividends will not be distributed evenly to all companies.

Take the banking sector for example. The progressive decontrol of interest rates and some banking businesses should promote competition and efficiency, leading to a stronger banking sector. But the resulting increase in competition could create problems for some banks that have for years enjoyed a guaranteed profit by the wide spread in the official lending and deposit rates. Many executives running these banks have neither the will nor the foresight to explore new ways to make money by business acumens rather than political influence.

A friend used to complain that her bank charged her a hefty fee for transferring money from her account to that of her parents' in another city. Now, she is using a newly established Internet platform to make the transfer at zero cost and with minimum hassle.

Many banks have claimed that they have successfully diversified their income stream through asset restructuring. But what they have done is simply package loans into what they call wealth management products which they sell to investors through a variety of channels. This has given rise to the unregulated and opaque world of shadow banking that has been a subject of much concern to many economists.

Obviously not all banks can be considered concept stocks despite all the talk about speeding up financial reform. Too many investors are still hunting for their idea of the perfect concept stock by looking for policy favors. Perhaps if they try to bring themselves more up to date, they would realize that times have changed and stop dreaming about the next big policy initiative that will boost stock prices.

The author is a senior editor with China Daily. Jamesleung@chinadaily.com.cn