Since the middle of June the Shanghai Composite, the world’s third-largest stock exchange by market cap, has lost 25 per cent of its value while the smaller Shenzhen Composite suffered an even bigger 31 per cent decline compared to the S&P/TSX Composite Index’s 1 per cent slide.
The China problem has prompted some investors to contemplate a global slide in stock prices.
Value investors are licking their chops as fears of further declines are potentially in the cards. One opinion from Oxford Economics sees stocks in China dropping another 35 per cent in order to be in line with long-term averages.
Should advisors here in Canada be worried?
“I think if I had stocks in China I’d be pretty concerned right now,” Raymond James advisor Chris Raper told WP. “Clearly the market got up and ran away from itself, say from the first of December on. Give it a few more days and it will right back where it started from, at the rate it’s declining.”
Raper is a value investor and while he didn’t say whether he’s looking to put client money into Chinese stocks (he’s heavily weighted in the U.S. right now and that doesn’t look like it’s changing anytime soon), he did suggest that the data there doesn’t support the stock prices that up until June seemed to be going nowhere but up.
“It’s one thing to have a market going up because businesses are prospering and the economy’s going well and that sort of thing, but that’s not what I see in China,” said Raper. “If anything the data’s going the other way.”
The Chinese government has stepped in to try to calm the markets and hoping to bring the three-week slide to an end including getting the state-owned brokerage firms to buy billions of dollars in Chinese stocks.
In addition it’s important to remember that China’s markets aren’t totally open and free. The government has a big hand what happens there.
“This is not a government that believes in unfettered markets,” said Arthur Kroeber, the Beijing-based head of research for Gavekal Dragonomics. “They never have, they never will. They believe markets are tools to greater ends – and if things seem to be going out of kilter, they’ll adjust things.”
Still, the Chinese situation is helping put the Greece problem into perspective.
“The conclusion I would draw from China,” says Raper, “is that we’ve got bigger fish to fry than Greece.”