27th July 2015
Stocks in mainland China recorded their sharpest one-day fall since 2007 on Monday, as the Shanghai Composite crashed by 8.5%.
The fall was driven primarily by weak economic data which brought up further concerns about the nation’s economic well-being as profits at China’s industrial firms fell 0.3% in June from a year ago.
Nigel Green, chief executive of independent financial advisory firm deVere Group, asserted that the dramatic slide also indicated that the Chinese authorities are perhaps reducing capital inflows following their “frenzied measures to support the stock market” three weeks ago.
He said: “It appears that, unsurprisingly, those measures are unsustainable in the longer-term, that the market is currently vulnerable without government support, and investors remain uncertain of the situation.
“This latest crash is another chapter in the China slowdown story. The unfolding situation in China is likely to create volatility in the financial markets until the end of the year. With this in mind, investors should consider ‘China-proofing’ their portfolios to manage risk and benefit from the inevitable buying opportunities.”
According to Green, the best way to achieve this is to ensure that portfolios are properly balanced across regions, assets and industries.
He added: “Whilst China’s slowdown is likely to be the big geopolitical driver of turbulence in coming months, I am confident there will be no hard landing as Chinese authorities have all the tools at their disposal to ensure it doesn’t happen.
“Indeed, the slowdown is on-trend. The economy is maturing and there’s a deliberate shift away from commodity-hungry infrastructure spending.”
However Green believes the Chinese government will need to do much more than they are currently doing to stoke domestic consumption to avoid the slowdown taking a firmer economic strangle-hold.
He said: “The expected volatility in financial markets triggered by China rebalancing its economy will present challenges and opportunities for investors, and due to China’s weight in the global economy, investors would be wise to bear this in mind when constructing and assessing their portfolios.”
But as Laith Khalaf, senior analyst at Hargreaves Lansdown notes: “While this was one of worst days ever for Chinese stocks, it is important to maintain some measure of perspective. Despite the recent sell-off, the Shanghai index is still 11% higher than when it started the year.
“The long term picture is more encouraging. While the exact figures are disputed, China’s economy is still growing at a higher rate than western economies, a positive backdrop for many of the country’s companies. Meanwhile the market appears to be gradually opening up to foreign investment, even if the recent trading suspensions are a retrograde step.”