Update on the Chinese Stock Market

July 27, 2015

On July 27, the Shanghai Composite Index tumbled 8.5%, the largest drop in a day since 2007.

Earlier this month, amid a market selloff, the Chinese government intervened using unconventional means to boost equity prices. Though it has been effective, the market now seems to be more sensitive to the government’s actions rather than actual market forces.

It’s questionable now how committed the Chinese government will be in supporting the market going forward and the International Monetary Fund has also expressed concern over the long-term impact of the Chinese government intervention.

What will the Chinese government do?

The China Securities Regulatory Commission is in damage control and has said that the China Securities Financial Corporation, a state-owned entity, will continue to support the market.

It’s still too early to say what the government will do to stabilize the market.

How do the events impact energy and the global market?

Given that it’s the second largest market in the world, China’s demand for commodities is significant. With the current selloff in the Chinese stock market, it is contributing to a selloff in energy.

Unlike other energy selloffs amid the global financial crisis, technological advances on the supply side have also caused a weakness in energy prices.

What could this mean for your portfolio?

Investors outside of China own merely 1.5% of the onshore equity market—the stocks that have been affected by the volatility, so your portfolio should not be directly affected.

MD’s exposure to China is primarily to the offshore equity market in Hong Kong, where we believe valuations are still attractive, and where there are more institutional investors. Institutional investors tend to focus more on company and economic fundamentals, and are less swayed by short-term sentiment.

Mandate versus benchmark allocation as of June 20, 2015

Among our mandates, MDPIM Emerging Markets Pool has the largest exposure to China, standing at just over 20% as of June 30, 2015. Compared to its benchmark, the MSCI Emerging Markets Index, which has a 24% exposure to China, it is underweight. We are confident that our emerging market managers are uniquely positioned to navigate through this difficult period.

Onshore Chinese Equity Trading at a Premium

* The index indicates how much premium (in term of percentage of price) the onshore equity is trading relative to its offshore counterpart in Hong Kong

As of July 24, 2015, the MDPIM Emerging Markets Pool has generated a total of 0.53% excess return from having an underweight allocation to Chinese equity in addition to selecting stocks that have outperformed the broader Chinese equity universe.

We 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.

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