Investors should beware a looming repeat of August’s Black Monday, when stock markets around the world plunged at their most dramatic pace since 2011, according to IG market analyst David Madden.
A month ago Chinese domestic ‘A’ shares plummeted 9 per cent in what was the biggest single day fall in the country’s stock market since the financial crisis. This prompted losses in market across the globe after a spike in negative sentiment towards the slowing economy caused traders to dump exposure to risk assets.
More than a third of the value of the Shenzhen Stock Exchange A Share index was lost in the 30 days to Black Monday on 24 August and these came after a bout of selling over the summer. The index had previously rallied 230 per cent in 13 months.
Since the Black Monday falls, global stock markets have made some recovery but are very much down from their highs earlier in 2105, which Madden believes could well precede another crash.
Performance of indices since Black Monday
Source: FE Analytics
He said: “There is a sense of another crash around the bend. Ever since Black Monday dealers have been extremely careful not to rush in and buy the market without good reason, and even when they do the buying tends to taper off fairly quickly.”
“We have had two days of serious declines in the last month and there is a feeling that some traders are scared to go back into the water. Equity markets are meandering along for now, but without extra encouraging news traders won’t stay in buying mode.”
He added: “Eventually the small gains that have been made … will be given up.”
Indeed, volatility in US stocks had a huge uplift in August as the VIX index – also known as Wall Street’s ‘fear gauge’ – surged. While it is down compared to its level on Black Monday, it is still at very high levels compared to the beginning of the year.
Performance of index in 2015
Source: FE Analytics
But Neptune’s Robin Geffen, who manages a host of funds totalling about £2bn including the £733m Neptune Balanced fund, thinks the summer’s volatility reflects concern over an expectation of rising US interest rates and that the role of China’s slowing growth has been overblown in significance.
“Investors have frayed nerves awaiting a US rate hike and this has amplified Chinese economic fears to a terrific volume. It is also true to say that Beijing made a significant error as it attempted to intervene and control its frothy and unrepresentative stock market – a largely pointless exercise that sapped confidence,” Geffen said.
“Yet, to believe China’s economy has precipitously worsened in recent months is unreasonable based on the evidence.”
“Over the past year the market has been driven forward by strong fundamental trends underpinned by changes in the real world – but over the last month a more animalistic sentiment has sent shares plunging.”
A strong dollar and reams of positive financial data on the strength of the US economy was the big driver prior to the correction in August, Geffen says, but the message from the US central bank emphasises its delay in putting up rates after the Chinese economic weakness rattled markets.
Performance of dollar versus pound over 1yr
Source: FE Analytics
““This has not changed. Even as she heralded a delay in the lift-off of rates, the US Federal Reserve chairman, Janet Yellen, reasserted this emphatically. Does Yellen … know more than we do? Has China’s central bank been whispering desperately in her ear?”
“These fears have shaken the second force that enabled markets to make real progress in the early part of this year: a belief that China’s slowdown would be managed and would not jeopardise aggregate global growth to a troubling extent.”
“We believe this is still the case and the market has capitulated to a level of fear on China that is unlikely to be reflected in forthcoming data.”
Geffen adds that while he backs the notion that a slowing Chinese economy could be in reality far worse than is suggested by government data, he still thinks the Chinese economy can do well in this environment.
“It is possible to build a real-time economic indicator for China using the many dozens of independent data sources that now exist.”
“An analysis on this basis suggests that in the real world Chinese GDP is running at somewhere around 5.5 per cent.
“Yes, this is lower than the 7.1 per cent still forecast by the World Bank but it is also the growth rate of a reasonably healthy economy, and well above the current consensus of doomsayers.”