Chinese stocks dropped the most in eight years on Monday as state intervention has failed to restore investor confidence in light of the country’s slowing economy and disappointment over the absence of any clear state policy action over the weekend.
The Shanghai Composite Index dropped 8.5% to 3,209.91 at the close. And the Hang Seng China Enterprises Index plunged 6.5% at 3:08 p.m. in Hong Kong, heading for its biggest decline in four years.
Around 800 stocks fell by the daily 10% limit on the Shanghai Composite, including China Shenhua Energy Co and China Shipbuilding Industry Co. The gauge has tumbled 38% from its June 12 peak to wipe out more than US$4 trillion of value.
Although China has taken extraordinary measures to prop up its markets, including forcing owners to hold stocks and limit the selling of stocks to 10%, worsening economic data and capital outflows are undermining the government’s attempts. Stocks across Asia dropped fast in the morning as investors’ hopes of the People’s Bank of China cutting interest rates or injecting liquidity was dashed.
Furthermore, a lack of action over the weekend from the PBoC brought grave concerns to investors that the central government is running out of tools or losing interest in bolstering its markets. The government’s decision to allow the country’s main state pension fund to invest in stocks for the first time created a path for cash to flow into Chinese markets, but it was not enough to prevent investors from selling.
China’s major stock market drop today comes when the last week of market news was dreary. Last week Hong Kong entered a bear market, as the market fell by 20% from a high reached in April, and the United States Dow Jones stepped into “correction” territory as it plunged by 3% on Friday. Currently European bourses has begun joining the global sell-off, with Frankfurt’s Xetra Dax 30 down in the morning, losing 3.1% and falling under the 10,000 points mark for the first time since January. Paris and wider Europe are also down between 3-4% as of 8am London time.
Has the market hit the bottom yet?
Investors may not have seen the bottom yet, but there is light at the end of the tunnel, according to Mark Haefele, global chief investment officer, UBS. “Investors should brace for further volatility. But we expect this bout of risk aversion to pass, with equities in developed markets resuming their upward trend” writes Haefele, in its CIO market note.
“Despite the ongoing weakness in some emerging markets, especially China, Brazil, and Russia, domestic drivers in the US and Europe have not deteriorated significantly and we expect growth to remain on track in these economically larger regions. We also believe central banks stand ready to provide support if sentiment worsens further. While the sell-off is a reminder of the value of a diversified portfolio, we maintain a positive outlook on risk assets,” says Haefele.
Xiangrong Yu, a senior analyst at CICC, believes that the bottom is close, and China’s central bank will continue to implement measures to stabilize the market.
“The PBoC has room to expand its re-lending to revive base money growth. We expect the government to ramp up spending on infrastructure in the following months. Targeted re-lending will allow the PBoC to support public investment while minimizing the crowding-out of private investment,” says Yu. “Finally, appropriate monetary and fiscal expansion would boost market confidence in China's economic prospects, which in turn is the key support for the renminbi.”
Sticking to the basics in a time of volatility
Haefele believes that investors should continue to follow the basis of investing, and adjust the portfolios as needed.
“In times of market turbulence, it is more important than ever to stick to sound portfolio principles. It can be easy to fall into behavioural traps, and sell out at the worst possible moment. We recommend that investors keep a watch on their portfolios, and rebalance methodically back to their target weightings for equities and bonds” says Haefele.
“Meanwhile, we will continue monitoring the situation for anything that would fundamentally hurt the case for equities and other risk assets. As things stand we remain comfortable holding equities in our portfolio for the long run. Unless we see a further significant sell-off, which might make us re-evaluate, we would like to give the market time to calm down, and see some of the upcoming macro data confirm our growth thesis before adding meaningfully to risk-on exposure,” he adds.
