Expert comment: “China market slump – it ain’t over yet”

7th January 2016

Jason Hollands, 
managing director
 at Tilney Bestinvest examines the market volatility engulfing China

For the second time this week we’ve seen another sharp, circa 7% decline, in Chinese domestic stock markets, once again forcing a suspension of trading under new “circuit breaker” mechanisms aimed to limit volatility.

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.

READ MORE: China suspends trading for the second time this week

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.

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, meaning 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”.

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

Across equity markets, we continue to favour those where the policy environment will remain pro-stimulus, notably Europe and Japan.

Both regions are already printing money but are nowhere near their target rates of inflation and therefore there is a real prospect of them stepping harder on the accelerator, which would support asset prices though the benefit to the real economy is questionable.

But we also think that in the current environment, investors should pay attention to absolute return funds which have a wider toolkit of instruments at their disposal to address volatility and are less exposed to directional movements in markets.

European equity funds we like include: Baring Europe Select (small/mid cap focus), Henderson European Focus (high conviction, unconstrained), Threadneedle European Select (quality growth) and for a fund which hedges the Euro currency exposure back to Sterling the Artemis European Opportunities Hedged fund.

Japanese equity picks include the Man GLG Japan Core Alpha fund (large cap value), CF Morant Wright Japan (mid-cap bias) and Schroder Tokyo (core).

Favoured absolute returns include two long/short strategies FP Argonaut Absolute Return (pan Europe) and Threadneedle UK Absolute Alpha; multi-strategy funds Invesco Perpetual Global Targeted Returns and Standard Life Global Absolute Return Strategies; and multi-asset absolute return fund JPM Multi-Asset Macro.

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