Jeff Salway: Don’t make drama out of China crisis

Shanghais financial district has felt the pinch as its stock market plunged 8 per cent on Monday. Picture: Getty

Fresh volatility in the Chinese stock market has left investors rattled as more money flows out of Asia and emerging markets funds. Many ordinary investors and pension savers are exposed to China through funds and other products that invest in the country either directly or indirectly. But while further volatility is inevitable, experts warn against panicking and suggest investors will be rewarded for keeping their nerve.

The Shanghai stock market plunged 8 per cent on Monday, the biggest one-day fall since 2007.

The index had doubled in value over the year to early June, before 30 per cent was wiped off it within a month.

Meanwhile the Hong Kong market, where most foreign (ie, non-Chinese) investors gain their stock market exposure to China, has fallen by 17 per cent.

UK investors and pension savers have responded by reducing their exposure to China. Almost £290 million was pulled from Asian equity funds in June, according to figures from the Investment Association, a record monthly outflow for the sector.

Aberdeen Asset Management revealed last month that investors had taken almost £1 billion out of its Asian and emerging markets funds in the three months to the end of June, the firm’s ninth successive quarter of emerging markets outflows.

The Chinese authorities attempted to steady nerves in July by suspending around 1,400 companies on the index from trading.

Its measures, which also included giving brokerages cash to buy shares, helped the market regain some 15 per cent of its value – a recovery which came to an abrupt halt on Monday with one of the biggest sell-offs the Shanghai market has seen.

While the uncertain outlook for China and emerging markets is cause for concern, however, it isn’t time for knee-jerk reactions, according to Richard Wadsworth, chartered financial planner at Carbon Financial Partners.

One of the most important things investors should do is separate China’s stock market from its economy, he said.

“The Chinese economy, the biggest in the world (on a purchasing power parity basis) continues to grow at about 7 per cent a year, about double that of any developed economy, and, while the IMF expects growth to ease back a bit, it is still projecting growth of 6.8 per cent for 2015 and 6.3 per cent for 2016,” he pointed out.

The Chinese stock market, by comparison, accounts for less than 3 per cent of the world market.

But there is a fear that events in China could impact negatively on other emerging markets, not least due to the implications for commodity prices. July saw the MSCI Emerging Markets index suffer its biggest fall in three years, losing more than 8 per cent of its value.

“China is the second largest economy in the world and the cornerstone of global growth,” Jason Hemmings, partner at Cornerstone Asset Management in Edinburgh, said.

“There is a worry that the recent sell-off in equities may spill into an economy that has already seen its growth almost halve over the last seven years. Asia relies heavily on trade with China, therefore any economic repercussions as a result of the equity fall will undoubted be felt by the wider Asian markets.”

Millions of investors have some form of direct or indirect exposure to China. The former might be through funds that invest in China, Asia or emerging markets, while indirect exposure can be through western companies with significant operations in China (such as commodities firms and some banks).

“Far East and Asian equities generally account for a small part of a well-balanced general equity portfolio,” Hemmings said.

“The higher up the risk spectrum an investor is, the greater the exposure to the likes of China and other emerging economies where the potential returns are superior but with greater volatility of potential for loss.”

For most retail investors and pension savers, the potential for long-term growth is the main reason to invest in China and emerging markets.

Sticking around for the long term also gives investors a better chance of riding out short-term volatility – of which there will invariably be plenty.

“This is one of those uncomfortable moments,” Wadsworth said. “Will markets fall further or recover? No-one really knows.

“What’s important from an investor’s point of view is deciding how much you want to be exposed to the excitement it brings and being willing to let your investment ride the peaks and troughs.”