China's equity rout: more bark than bite
Sadiq S. Adatia
Opinions as of July 9, 2015
FLASH MARKET UPDATE
China's equity markets are in a tailspin. The CSI 300 Index, which represents the 300 largest A-share stocks of the Shanghai and Shenzen indexes, has tumbled more than 30% since early June. (A-shares are shares of mainland China-based companies. Trading in A-shares is typically restricted to Chinese citizens. H-shares are also shares of mainland China-based companies, but they trade in Hong Kong, which is more open to foreign investors.)
For many retail investors in the country, not to mention listed companies, state-owned enterprises, government officials, brokerage houses, the central bank and plenty more, it’s nothing short of panic.
While a plunge of this magnitude certainly looks bad, it pays to keep things in perspective. At its peak in early June, the CSI 300 Index had soared to a level two-and-a-half times higher than where it had been roughly 12 months earlier – an incredible gain by any measure. Some might have said it was too good to be true. Yet even with the recent plunge, as of July 9 the CSI 300 Index is still up almost 85% from June 2014.
Part of the run-up is being attributed to falling residential real estate values, which may have pushed retail investors out of their preferred investment vehicle (real estate) and into stocks. Investing with borrowed money also appears to have been a significant contributor.
This chart illustrates just how drastically disconnected the equity market has been from the "real" economy.
Market participants have pulled out all the stops to halt the slide. There have been central bank rate cuts, attempts to lure investment from local government pension funds, a reduction in securities transaction fees, an easing of margin rules, commitments from brokerage firms to buy shares, and all manner of additional stop-gap measures.
We don't believe the stock slump, even if it continues, will have a significant spillover effect on the global economy. But we can't ignore the possibility that an already-anxious market (thank you Greece) is only growing more anxious, which could eventually lead to greater downside pressure on global equities.
Our view on emerging markets, including China, has always been long-term bullish, primarily because of the region’s overall stronger growth profile compared to developed markets.
We took down our overweight position to emerging markets in our Sun Life Granite Managed Portfolios in March given the run-up in emerging markets at that time. This is an example of our tactical approach in action: the ability to dial-down risk when we feel market conditions warrant.
We expect to see more downside in the short term, but from a longer-term perspective, we continue to believe there is value in emerging markets. Investors must be prepared to shoulder the additional volatility typically associated with this asset class in exchange for what we believe will be healthy returns over time.
Facts published in this commentary were sourced from news articles by Reuters and Bloomberg News.
Sun Life Granite Managed Portfolios invest in mutual funds and/or exchange traded funds (ETFs). Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.