Fragile China, Fragile Global Economy

Given the turbulence on global stockmarkets this week I thought it would be appropriate to write with my comments. It is often said when the US sneezes the world catches a cold. This mantle has clearly passed to China or at least it is now shared by her.

In one sense the sharp sell-off in China at the start of the year is somewhat surprising. It is not unreasonable to ask what did the markets know on the 4th January that they didn’t on the 31st December? We knew China’s economic growth is slowing, that she is rebalancing her economy from investment and exports to consumption, that there is high indebtedness and there are problems in the banking sector. None of this is new so why was there a sell-off? Charles Awdrey, manager of the Henderson China Opportunities fund explains the plunge with local investors in A shares* selling en masse prior to the removal of a ban on major shareholders dumping their shares, a measure introduced after last August’s sell-off. In addition a depreciating renminbi and Monday’s data release showing a decline in December’s Purchasing Managers Index (PMI) spooked investors. The PMI reflects the health of the manufacturing industry and it fell from 48.6 in November to 48.2 in December below market expectations (Source: Trading Economics). Any figure below 50 indicates a contraction.

I am minded to conclude the sell-off was an over-reaction driven more by investor sentiment than economic fundamentals. Awdrey perhaps agrees as he considers this is a good time to acquire or add to favoured stocks. Incidentally he invests mainly in Hong Kong listed H shares* which offer more reasonable valuations and are less volatile than A shares. Despite this the global economy is still fragile with bad news like a decline in the PMI packing a big punch and veteran investor George Soros fears a 2008 style global crisis. Similarly Neil Woodford, arguably the UK’s best fund manager is bearish and  believes China will face a hard landing. Against the consensus he also argues the interest rate rise in the US was a policy error and should be reversed! He is concerned that the global economy is deteriorating and that the developed economies are in no fit state to cope with higher interest rates. He dismisses any rate rise in the UK anytime soon.

So 2016 has got off to a bad start but if Soros and Woodford are right it could get a whole lot worse.

*A shares are listed on mainland China on the Shanghai and Shenzhen stockmarkets. Most foreign investors invest in H shares listed in Hong Kong although there is now access to A shares.

 

The contents of this post is intended to be general economic and commentary and  not an invitation to invest in equities or specific markets as these may not be suitable for your financial circumstances or your risk profile. You should seek individual advice before making investment decisions.