Panic selling returns on China fears

Panic returned to markets in late August as a severe collapse for Chinese stocks led to renewed fears for the health of the global economy. Chinese markets, particularly the domestic A-shares, have enjoyed an extraordinary rise over the past year, but this unravelled over the summer, culminating in the panic selling in late August.

Markets not immune

Dean Tenerelli

No global market was immune to the sell-off, with most suffering the worst trading day since at least 2011 on 24 August. Almost £74bn was wiped off the value of the FTSE 100 Index on ‘Black Monday’, while the S&P 500 and Nasdaq both firmly entered correction territory.

The most recent fears over the crucial Chinese economy followed the country’s August decision to devalue its currency against the strong US dollar. Nordea 1 - Emerging Stars Equity Fund manager Jorry Rask Nøddekær accepts China’s currency devaluation significantly increased risk aversion. However, unlike many market participants, he does not see parallels to 1997’s Asian financial crisis. “We do not believe we are at the forefront of a new financial crisis,” Nøddekær says. “China is in the middle of a long process to open up its economy and reform its financial system. As part of this process, China will need to have a truly exchangeable currency. “On most FX models, China does have an overvalued currency.”

Nøddekær adds: “China is clearly slowing from a growth perspective. As we have been saying for some time, the ‘old style’ China as we knew it is not coming back. This transition from the old economy to a new service and consumer-driven economy is definitely painful for some parts of the old economic engine.” Dean Tenerelli, manager of T. Rowe Price’s European Equity and Continental European Equity funds, says China’s importance to the world should not be underestimated. “China is a big trading partner with Europe, in particular Germany. We have been saying for the past year that our main worry in the world is China,” he explains. “China is clearly decelerating and the economic indicators lately have been uninspiring. Recent policy action, such as the currency depreciation, shows that the Chinese government is also concerned.” However, Tenerelli does expect the China slowdown to spell doom for European equities. “We believe the earnings recovery in Europe is well underpinned. The recent earnings season was the best we have had for five years and the European portion of earnings is highly encouraging,” Tenerelli adds. “Could China derail everything? It could result in a slower recovery, but we still believe Europe is headed in the right direction.” As for Chinese equities, Nøddekær is urging investors not to paint the communist economy’s markets with the same brush. “It is very important to view the mainland A-shares and the Hong Kong-listed H-shares separately,” Nøddekær says. “These markets are quite different in structure, they function differently from a technical perspective, and they are driven by different kinds of investors. “Nonetheless, this does not mean there is no correlation between the two markets from a sentiment perspective. “This is precisely what we have seen lately.”