The drop in Chinese Equity Markets has been a headline story that’s created emails and phone calls from clients as the turmoil has carried over into the US Markets to begin the year.
Client’s want to know why it’s happening and what we are doing about it; and those are legitimate concerns. Our answers have been much in line with an article that I read this weekend. The article is from Katina Stefanova from forbes.com and discusses an interview with Amit Hampel in which the Chinese markets were the focus and the information included is helpful. The full link to the article is here:
To summarize the article – The famous Field of Dreams Quote from James Earl Jones is not playing out: China has built it, but nobody is coming.
China has reshaped the global economy for the last 25 years. It’s experienced major expansion and has funded that expansion through manipulating its currency. They have dumped tons of money into the industrial process depending on future global demand to justify its infrastructure investment. Here is a chart from the article on Forbes’ website that depicts that investment through illustrating Chinese export from 1995-2014:
But…Consumers are just not consuming the things China has built and that’s a problem. Hampel discusses some external reasons for that in more detail.
China is attempting to combat this problem with the devaluation of the Yuan – which creates another set of issues:
“With the devaluation of the Yuan comes a very large price in the form of investment flight from China. This further appreciates the dollar and places even greater pressure on emerging markets that have built themselves around the fortunes of the great Asian giant.”
This is all happening at the same time the fed is rising rates. Stronger dollar and higher borrowing costs put further pressure on emerging markets. The road will most likely be difficult for these economies moving forward.
On the other hand, the current state of the US economy is actually showing signs of strength on multiple fronts.
So what does all of this mean for investors?
Hampel’s answer for that is an echo of our own sentiment: “ The old buy everything trade is simply not going to work anymore. Investors will have to become more selective and dynamic with their money.”
This is Behavioral Momentum – our proprietary strategy and core piece of our portfolios for gaining stock market exposure. A systematic process to continually gain exposure to areas where good things are happening. The ability to adapt and adjust.
It’s our belief that this type of focused approach is needed now and will be needed in the future as we see a difficult path for global markets moving forward.