Little has economically changed in China in the last three week except for some weaker economic numbers and some poor market behaviour. The question is whether investors had become complacent towards the end of 2015, when the Chinese growth slowdown story was becoming old news?
There could of course be a second round of global growth impact that isn’t priced in and only the passage of time and some more economic and corporate results from the West and China will reveal this. The US Q4 reporting season starts this week with the usual Alcoa bellwether whilst Q4 GDP from China is published on January 19th and forecast to be 6.9%.
Investors should not look at the Chinese stock market and draw parallels with developed stock markets in the West. It is an immature marketplace, dominated by private investors who treat it like a casino, with a lot of short term speculators who trade in and out, often intraday.
Worse still, the regulators of the market are similarly inexperienced and are trying to wrestle with the implications of their own doing when they let the beast free in 2015, encouraging leverage and speculation for the general public. Clearly, the authorities did not fully realise the consequences of their actions and it illustrates their misunderstanding of free markets having been constrained in a relative environment of fear and control up to that point.
Fear and greed are traits of human nature which are arguably, at times, the two biggest influences over short-term market movements with fear easily outweighing greed or actually covering both bases via the fear of losing money and the fear of missing the opportunity to make money!
This is why it is so useful to watch the so-called Fear Index, or VIX Index, as it is known which is currently elevated principally because of the behaviour of inexperienced investors and regulators.
We all want to buy a bargain but with the investment markets, whenever apparent bargains present themselves via a sudden downward pricing adjustment, investors become scared and stand back as fear takes hold.
It is true that the current outlook is very opaque and nobody knows about the true global impact as China moves from an investment-led economy to a consumption-led economy. It is unlikely that 15 years of exceptional growth driven by massive infrastructure investment will unwind in a year without painful consequences.
Most exposed are the commodity exporting countries and companies. We feel it is almost inevitable that some corporate and sovereign defaults will occur and many are living on borrowed time and money which will run out soon with headline grabbing consequences.
The effect of this Chinese volatility and the elevated VIX Index serves to show just how nervous investors are, which presents opportunities for the brave and those with cash wishing to invest for the longer term.
It may get worse before it improves with the point of capitulation panic-selling yet to come but with the FTSE-100 alone being almost 17% below its peak of April 2015, investors should be asking themselves at what level would they enter this market if not now.