After rebounding from its falls earlier this month, the Chinese share market fell last night by more than 8.5%, as measured by the Shanghai Composite Index. The most recent fall marks its largest single day descent since 2007, and appears to reflect a combination of factors that are contributing to negative sentiment among investors. Notwithstanding the volatility experienced over the past few weeks, those who have been invested in the market for the past year have still generated positive returns of approximately +70%.
What led to the most recent round of falls?
The most recent falls appear to reflect a combination of factors. These include poor Purchasing Managers Index data released on Friday, moves to allow a more volatile Reminibi currency, as well as a testing of the resolve of the Government to support the market.
Our current analysis suggests that the negative sentiment we have seen in the last few days is the sort of typical volatility that is often experienced following a significant share market correction. Following the share market fall in 1987 as well as the Global Financial Crisis, share markets took time to build firm bases, and entered periods of protracted volatility before then commencing clear rising trends, and it’s likely that this is what we are now experiencing with China.
What does this mean for global markets?
Globally, while volatility is likely to remain high, and a further correction is possible, we see little risk of a recession or bear market in global shares at this point in time. We also expect the Chinese government will support economic growth through strong monetary policy easing and other measures which, in turn, should help support Chinese shares. We will continue to watch and monitor the market, and will make necessary changes to portfolios as the situation evolves.
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