Is It Indeed All About China?

Stock markets all over the world have been falling dramatically since the very end of 2015. The world’s FTSE index dropped by approximately 9% in the first weeks of 2016 while the US S&P 500 reached an almost 4-month low after, at one point, having plummeted by almost 10% over two weeks.

Not a very welcome surprise to investors, and especially to those invested in commodities-related stocks, was the alarming landslides in China’s stock markets. On January 4th, when trading restarted for 2016, China experienced a mass selloff of equity that caused a plunge of 7% in roughly half an hour, after which the market was closed down for the day. The circuit-breaker (that was meant to control the market if such a drop were to occur) was what seemingly pushed forwards another fall of 7% the same week, due to investors’ fighting to sell off their stocks before the trading would be closed. After the dismal experience with the instrument, the circuit-breaker has since been removed.

Why China in particular? China has been trying to shift away from refinery and manufacturing and towards customer services and information; a growth model that would be more characteristic of developed nations. Together with depressed commodities markets and devalued yuan, the huge selloffs in China on January 4th and 7th incited concern in investors all over the world.

The reason why China’s situation is particularly worrying for the world is because, as the second largest economy in the world and a developing market, it is another sign of the world’s emerging markets slowing their growth and thus forecasting a possible future decline for companies that deal in commodities such as oil, energy, metals etc. This, in turn, tells shareholders to get their hands clean of all ‘high risk’ investments in anticipation of possible defaults on debt.

However, the tail-end of January saw some improvements in the global equities’ markets, after oil prices moved away from their dangerous lows reached during January and after Japan’s Central Bank joined the trend showed in Europe by dropping their interest rates on part of reserves to below zero, to -0.1%. In addition to encouraging investment and stimulating the Japanese economy, the measure also proved effective in bolstering Europe’s and US’ markets, as can be seen by a rise in their respective indices on the announcement of the decision.

For now, the world’s equities markets move in tandem with crude oil prices – a strong indication of risk in high-yield bonds. Meanwhile, China is likely to devalue yuan even further, because of their federal policy. A weaker yuan will move China towards export and help their economy, however, it will also cast even more doubt on the oil and energy sector.

By Reinis Jēkabs Ozols
Market Analyst at the Investment Fund