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Don’t panic over the China-led market rout, says Mark Dampier

07 January 2016

The head of research at Hargreaves Lansdown says that while volatility in global equities is likely to persist, long-term investors should sit tight and wait for inevitable buying opportunities.

By Alex Paget,

News Editor, FE Trustnet

The Chinese equity market was closed down for a second time this week thanks to significant selling from domestic investors, which has caused hefty falls across global indices.

The Chinese authorities have recently introduced a ‘circuit breaker’ mechanism within the country’s equity market, whereby all trading is ceased for 15 minutes if stocks fall 5 per cent in an attempt to stop an out-an-out crash. If they fall a further 2 per cent once trading resumes, the market is closed for the rest of the session.

Unfortunately, this ‘circuit breaker’ has already been triggered twice this week (on Monday and earlier today, the latter coming into effect just 870 seconds after the market opened) as a result of poor PMIs out of the country, the devaluation of the yuan and further concerns of a ‘hard landing’ in the world’s second largest economy.

All of this has caused significant falls in global markets already in 2015 and helped to create a real sense of bearishness among investors. According to FE Analytics, all major regional equity markets are in negative territory this year.

 

Source: FE Analytics *figures do not include this morning’s falls

The FTSE 100, for example, is (at the time of writing) trading at 5,900 which represents a 6 per cent fall in price terms since the start of the weak.

There is also a sense of déjà vu among investors as China, with the bursting of a bubble in its ‘A’ shares market, slowing growth and the surprise devaluation of its currency, was the major source of bad news in 2015.

With the situation in China seemingly worse already this year, investors could be forgiven for wanting to run to ‘safe’ assets such as cash to dodge further falls in global markets.

However Mark Dampier, head of research at Hargreaves Lansdown, says that investors shouldn’t panic and should try and ride out the inevitable volatility as there will be good opportunities to take advantage of market dips.

“Long term investors should sit tight. The Chinese market falls are also hurting global markets which look painful in the short term but are beginning to present buying opportunities,” Dampier (pictured) said.

Nevertheless, Dampier admits that there are reasons to be cautious at the moment and says that huge levels of market interference on the part of the Chinese authorities is doing far more harm than good.

As a result, he says the situation could deteriorate over the short term.


 

“The wider problem is the Chinese economy slowing and the Chinese authorities doing what they can to stimulate growth. Investors are nervous of economic slowdown and after losing all the gains we saw in the year to August 2015 the Chinese authorities are trying to prop up the markets with various artificial measures.”

Performance of indices in 2015

 

Source: FE Analytics

“The problems this week are to do with what could happen on Friday, when a ban on short selling and other share sales bans is expected to end (it may be extended) and investors are naturally trying to adjust their positions accordingly,” he said.

“Clearly the circuit breaker is having the opposite effect to what is intended and is making things worse. It also stops the market having any chance of bouncing. Had it been introduced during 2015, it would have been triggered 20 times.”

He added: “The interference by the authorities is simply delaying the inevitable. The market needs to find its own level so we will see more volatility in global markets until it does.”

Nevertheless, AXA Wealth’s Adrian Lowcock also urges investor to not make any rash decisions now given markets have already fallen considerably already.

“More often than not stock markets fall with little warning, leaving investors suffering significant drops in the value of their investments. Acting after the event does little to restore the value of your portfolio,” he said.

“By having a well-diversified portfolio and holding funds where the managers look to protect capital from the effects of volatile markets means investors are better prepared for the next correction in stock markets whenever that will be.”

That being said, Fidelity’s global chief investment officer for equities says investors need to realise that the events out of China could have serious consequences for parts of their portfolio.

He points out that the slowing growth in China and falling sentiment towards its equity market are deflationary impulses, partly because these headwinds will put even further pressure on bombed out commodity prices.

Performance of index over 3yrs

 

Source: FE Analytics


 

“Global equity markets are now battling the third wave of deflation since 2008,” Rossi said.

“The epicentre is not within the developed world nor the financial system but, this time, within the developing world and the global manufacturing sector, where capital allocation has been poor and where overcapacity is rife.”

“A crisis in emerging currency markets has been flagging these problems for 18 months. The catalyst, now, is the Chinese yuan which is working through a necessary readjustment. A lower yuan will further deflate the demand for commodities and traded goods generally. A further downside adjustment to potential world output is now unavoidable.”

Jason Hollands, managing director of business and communications at Tilney Bestinvest, strikes a far more bearish tone, however.

He warns that the developing crisis in China is likely to escalate over the course of the next few months which will have inevitable ramifications around the world.

“This is likely to lead to further contagion on developed market exchanges, as it reinforces fears about the health of China and the wider ramifications for the global economy,” Hollands (pictured) said.

“In our view a Chinese hard landing, remains a serious possibility though we expect increasingly desperate measures to be taken to delay what may turn out to be inevitable. These include interventions and controls on the stock market as well as the property market, interest rate cuts and most concerning of all for the global economy, further devaluation of China’s currency, the yuan.”

He says the most concerning part of the story, according to Hollands, is that China’s share of global exports has never been higher at a time of declining world trade but it has sustained levels of capacity with companies simply discounting prices rather than allow a normal, healthy default cycle.

“[This means] there is a real risk that it could choose to allow a significant devaluation of its currency to boost its export competitiveness and dump this capacity around the globe. That has the potential to export a tsunami of disinflationary pressures and a further talk of ‘currency wars’.”

As a result, Hollands says that now is the time for investors to review their portfolios as being selective is going to be vital.

“Slowing global growth (with China at its epicentre), disinflationary pressures but continued high levels of government and consumer debt constraining consumption growth, combine to make for a cocktail of concerns in the outlook for 2016 which is why in the near term we think investors need to take tread with caution and be very selective on where they invest,” Hollands said.

He added: “Just “being in the market” won’t be good enough.”

 

In an article tomorrow morning, FE Trustnet asks the experts what investors should be doing within their portfolios on the back of the recent market falls. 

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