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Update on the Chinese Stock Market

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.

The information contained in this document is not intended to offer foreign or domestic taxation, legal, accounting or similar professional advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals. Incorporation guidance is limited to asset allocation and integrating corporate entities into financial plans and wealth strategies. Any tax-related information is applicable to Canadian residents only and is in accordance with current Canadian tax law including judicial and administrative interpretation. The information and strategies presented here may not be suitable for U.S. persons (citizens, residents or green card holders) or non-residents of Canada, or for situations involving such individuals. Employees of the MD Group of Companies are not authorized to make any determination of a client’s U.S. status or tax filing obligations, whether foreign or domestic. The MD ExO® service provides financial products and guidance to clients, delivered through the MD Group of Companies (MD Financial Management Inc., MD Management Limited, MD Private Trust Company, MD Life Insurance Company and MD Insurance Agency Limited). For a detailed list of these companies, visit MD Financial Management provides financial products and services, the MD Family of Funds and investment counselling services through the MD Group of Companies. MD Financial Management Inc. is owned by the Canadian Medical Association.