January 13th, 2016
Chinese Volatility
A “clown show“ is how one analyst described China’s stock markets recently: The world’s second largest economy is home to the developed world’s most immature stock markets. Here’s a few reasons China’s stock markets are down over -12% this year so far and why our stock markets are suffering in sympathy, S&P 500 down almost -6% at the end of the first week of 2016.
1. Investing Frenzy: Last April an official Chinese government publication urged citizens to jump into the market. In the next two and a half months 38,000,000 new accounts were opened–a 400% increase over the number of accounts opened in 2014! And these small, notoriously skittish investors (called “aunties”) invested largely with borrowed (“margin”) money making them more vulnerable to market volatility. “Retail exchanges, equipped with audience seating, attracted retirees and other small-time investors who spent hours scanning the digital displays, like visitors to the dog track.” (Evan Osnos in the New Yorker)
2. Stock Shackles: Six months ago (July 8th) China imposed a “lockup” on all 5% or more shareholders…they couldn’t sell shares till January 8th. Wednesday they extended it three more months trying to cage a bear market and thereby increasing the downward pressure. These Chinese investors who are panicking to sell have been unable to flee sinking stocks.
3. Imploding Implementation: Implementing poorly planned automatic stock market “time-outs” when the markets fall 7% or more has only caused more desperate selling when the market reopens. Chinese markets are so volatile that twice this week their markets have been shut down shortly after opening…Wednesday’s market day lasted only 14 minutes! This has only heightened the volatility. Now, after four days they are cancelling their new “circuit breaker” regulations…a revealing admission of their misdirection.
4. Wallet Woes: China’s central bank devalued their currency Thursday, by its largest adjustment since August 13th. Chinese worry that Yuan-denominated assets will continue to depreciate their holdings pushing more investors to already crowded exits.
“When European and US traders awoke to an even bigger Chinese shambles on Thursday, the reaction was derision tinged with a mixture of glee and fear — and it was not at all flattering of the country’s leadership. ‘I don’t trust anything about China,’ said Jim Cramer, CNBC financial commentator. ‘Do they have any idea what they’re doing? I think that’s the biggest worry.’ ” (Financial Times)
We who are primarily US investors should remember that 87% of our economy is based on business that occurs inside the USA. Only about 13% of our economy is based on exports of goods and services. However, we live in a global economy and when China gets the flu the US economy may get a short-term cold from the effects of a global slowdown. This is not new: this drop in US stocks is similar to the China-inspired drop of 12.4% in August, 2015.
While it’s always troubling to see volatility, there are still bright spots in our own economy including a positive report on job creation just today. We will continue to hold strong Morningstar approved companies believing that China’s troubles will have a limited effect on the utility and other essential services companies we continue to buy when prices become even more attractive.
We hope you had a great start to the New Year. Please contact us if you’d like to discuss this further or if there’s anything else we can do for you.