China Update


In a week where the City usually heads to the beach for summer, traders were ambushed by a wave of volatility.

The previous week’s devaluation of the Chinese yuan was followed by the release of poor Chinese manufacturing data that fueled concerns about slowing global growth. The damage had previously been contained to cyclically-sensitive companies like transportation, commodities, industrials and sub-segments of technology, but last week it spilled over to all risky assets. The FTSE 100 fell 5.5%. This was the biggest weekly point decline since the middle of the financial crisis.

The volatility spilled into this week beginning with a rout in Asia when Chinese policy makers failed to cut rates or bank reserve ratios as investors expected. This pushed the Shanghai Index down 8.5%. This is the ninth consecutive day of losses and it is now down more than 20% from highs achieved in April. The carnage moved westward with most European markets down approximately 4%.

While there are legitimate concerns about global growth decelerating, we view the chance of a recession as minimal. Since historically this is the cause of the vast majority of “bear” markets (defined as a drop of 20%-plus), we feel we are simply witnessing a stock market correction. Undoubtedly these are uncomfortable, but it’s important to remember that successful long-term investing requires fortitude during these cleansing periods. It is during these stressful radical moves that investors with long time horizons can pick up the proverbial baby thrown out with the bath water. We recognise that these situations are dynamic and are continuously monitoring market developments, but we remain true to time-tested investment discipline and process.

Investors who succeed do so long-term by sticking to their plan, especially when the markets are dicey.

The current market volatility is uncomfortable, but it’s not unusual or unexpected.