Have I returned from holiday to summer madness or is the China selloff a serious situation that changes my whole thesis for investing?
China’s GDP growth is slowing from 7 per cent to somewhere lower and more opaque – not exactly a shock and something I’ve spoken about before. However, the 3 per cent devaluation of the Chinese renminbi against the dollar earlier this month was unexpected. We must be careful how we judge equity markets in terms of the weaker renminbi.
The Chinese government has already admitted it’s trying to introduce greater market forces to the economy as part of its transition from an investment-led to consumption-driven growth strategy. What we’re seeing in the east appears to be the growing pains from that readjustment.
Ultimately, the selloff in global equities has been driven by how exposed the companies are to the Chinese economy or to prices dependent on Chinese demand, such as commodities. This is a belated market realisation of the lower Chinese growth reality. On Tuesday last week, the day after the dramatic falls, most developed and emerging markets had begun to recover somewhat, although China and Japan remained in the doldrums.
A sentiment-fuelled selloff creates a perfect opportunity for an active manager to exploit short-term fluctuations by sorting the likely winners from the losers, and buying favourable shares at better prices. I believe what happened last week was about sentiment, not fundamentals.
I’m underweight emerging markets across a number of Rathbone portfolios and I’m not rushing to buy emerging market equities carte blanche after the market falls. However, I have added to my holdings in ChinaAMC China Opportunities and Veritas Asian in Strategic Growth. After taking profits when the Shanghai market took off mid-year, I think now is a reasonable time to buy back in. Both Chinese and wider Asian growth remains a major long-term theme of our time that cannot be ignored.
I am also increasing developed market holdings. I believe global growth will be strong enough to support current profit projections in the developed world, despite the wobbles in China.
Equity markets are down between 10 per cent and 20 per cent from their peaks earlier this year, although the Shanghai Composite is down much further. I’m buying equities at reasonable prices for the long term.
So, it’s not the end of the world – markets are recovering. Ok, the sun can barely shine much longer than a morning, but we can’t have everything – this is the UK after all.
David Coombs is fund manager of the Rathbone Multi-Asset Portfolios.