China’s stock markets began the new year in panic mode.
The CSI 300 index, which tracks the largest stocks on the Shanghai and Shenzhen exchanges, fell 7% on January 4, triggering a circuit breaker to halt trading around 1:30pm local time.
Concerns about its declining manufacturing sector, excessive leverage, falling currency, and the end of Beijing’s intervention to prop up the Chinese stock markets were the cause of this widespread anxiety.
The positive news is that in December 2015, the service sector expanded at a faster rate compared to the previous month. This shows that China’s economic rebalancing—from an export- and investment-focused growth model to one that’s consumption-driven—is well intact.
The Chinese government is also committed to reducing excess capacity and leverage in the economy, which can be interpreted as a less accommodative monetary policy than expected (i.e., a slower-than-expected pace to cut interest and reserve ratio) going forward.
Is the latest event a fundamental pullback or another volatile day?
Volatile markets are often triggered by investor sentiment. When China announced its circuit-breaker rule in late 2015, it was to help curb excessive market volatility.
However, the newly implemented rule may have intensified the panic selloff as the market moved closer to the thresholds, due to certain market participants’ concern over liquidity and risk.
MD is not making immediate tactical changes to our portfolios at the moment. We continue to monitor the slowdown in the Chinese economy, which has been ongoing for some time.
How much exposure does MD have to China?
Investors outside of China own a mere 1.5% of the onshore equity market—the stocks that have been affected by the nosedive.
MD’s exposure to China is primarily to the offshore equity market in Hong Kong where there are more institutional investors. Institutional investors tend to focus more on corporate and economic fundamentals, and are less swayed by short-term sentiment.
Among our mandates, MDPIM Emerging Markets Pool has the largest exposure to China, at just over 23% as of December 31, 2015. Compared to its benchmark, the MSCI Emerging Markets Index, which has a 26% exposure to China, it is underweight.
We are confident that the MDPIM Emerging Markets Pool is well positioned to navigate through this difficult period as we seek investment opportunities in companies with consistent and high quality growth as well as companies that are undervalued relative to their fundamentals. The focus on bottom-up company fundamentals rather than short-term market volatility is designed to help our clients to achieve their goals in the long run.
How do the events impact Canada and MD portfolios?
Given that it’s the second largest market in the world, China’s demand for commodities is significant. The selloff in the Chinese stock market is another signal of ongoing weakness in commodity prices, which translates into slower economic growth in Canada. However, other parts of the world, such as the U.S., Japan, Europe and China may all benefit from a lower oil price.
MD’s portfolio approach is designed to help you meet your goals and remain diversified over specific time horizons.
We continue to recommend that investors with short-time horizons to have meaningful exposure to fixed income investments which tends to perform well in volatile markets. For investors with longer time horizons, we are confident that the longer-term trajectory for equity markets is positive.
We are monitoring the situation and encourage you to speak with your MD Advisor if you have any questions about your portfolio. Your MD Advisor can work with you to ensure your portfolio is diversified and well positioned to withstand market volatility.