Shanghai is around 8,000 miles away

25 August 2015

Chapters Financial has, with the help of its external investment consultant, Cormorant Capital Strategies, prepared some comment on the situation and, where possible, placed some context to the current and evolving position. Cormorant Capital Strategies notes:

The following extracts from Bloomberg's daily Economic Brief sum up what's happening over there…
'In the second quarter, China's markets and economy were in a virtuous circle upward. In the third quarter, they are in a vicious spiral down. The Shanghai Composite Index fell 8.5 percent to 3,209.9 at the close on Monday. The index is now down 37 percent from its mid-June high and below the 3,500 mark that many investors expected the government to defend.'
Furthermore… 'All of the forces that accelerated market momentum on the way up are now working in reverse on the way down. The balance of outstanding margin loans has fallen to 1.4 trillion yuan, down from a peak of close to 2.3 trillion yuan in mid-June. The number of new trading accounts has slumped as the "greater fools" on whom speculators had hoped to offload stocks have wised up.'
Doubtless some investors did expect the Chinese authorities to defend stock prices but there is not really a mechanism, nor a precedent for that matter, for a government to force higher stock prices. Of course, the government will do something. It will engage in more easing – most likely in the form of reduced reserve requirements for banks – and that might go some way to settling investors. But it won't sustain asset prices for long. And besides, the Chinese government has far larger fish to fry.
China's economy is slowing. That's not necessarily a bad thing. Indeed, it's something of a necessity if policymakers are to be successful in re-balancing the Dragon economy toward a more sustainable model – away from debt-fuelled investment on the one hand, toward higher household spending driven by rising incomes on the other. The alternative is worse – economies with over-sized investment tend to slow too, ultimately, but in a much more dramatic fashion. And that would be a disaster for the one party, in a one-party system, whose legitimacy is founded on lifting living-standards. Therefore, the period of transition that China faces is a very difficult one. Success, if it is successful, will be hard won.
In the meantime, China's slowdown comes at a difficult time for other parts of the global economy. Brazil and Russia are in decline, so too is Japan, and the Euro-zone is struggling to escape the doldrums. It seems a great many investors were counting on China – which, according to the Wall St Journal, 'accounts for 15% of global output but has contributed up to half of global growth in recent years' – to maintain some momentum.That may not be a good assumption.
This is why we recommend diversified portfolios. Over the period 08/06/2015 (coinciding with the peak on Chinese stocks) to 24/06/2015 the average Global Equity fund has fallen 7.4 percent. Meanwhile the average Gilt fund has risen 3.4 percent and the average index-linked gilt fund has risen 4.5 percent (Investment Association sector averages). Past performance is not a guarantee of future performance.
We also ensure that our clients' liabilities are properly planned for. That way investors can maintain a long term view and avoid enforced sales during periods of market turbulence.
Long term investors with diversified portfolios should have little to fear from market volatility.
Recent changes in various markets are well illustrated below:

IA: Investment Association

TR: tracker

If you would like to review your investment, pension, ISA and other arrangements then please do contact the team at Chapters Financial, either at their Guildford or Woking offices.

Chapters Financial will watch the global markets with interest. Thank you to Steve Williams, Director at Cormorant Capital Strategies for his insight.

No individual advice is provided in the text of this blog.

Keith Churchouse FPFS
Chartered Financial Planner
Certified Financial Planner
ISO22222 Personal Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.