Will China’s Year of the Red Fire Monkey bring joy to investors?

Having taken the US interest-rate rise in their stride at the end of 2015, they had a wobble on the back of sharp falls in the China ‘A’ Share market, which is dominated by domestic Chinese retail investors.

In the first week of the year alone, trading was suspended twice on the exchange after falling 7% on two separate occasions. The second time, the market was open for less than 30 minutes before an automatic ‘circuit breaker’ cut in and brought everything to a grinding halt.

Having had a bad experience in the summer of 2015, when the ‘A’ Share market enjoyed a rapid rise of more than 60% before it then experienced a meteoric fall of 45%, the Chinese government introduced the circuit breaker in an attempt to help avoid investor panic in the future. However, instead of helping, it seemed to hinder, and the circuit breaker was subsequently removed.

But what caused the January rout? We’ve known that the Chinese economy has been slowing for some time, so the weak data reported at the start of the year should not have come as a surprise. Currency worries were the most likely culprit. If the Renminbi (the Chinese currency) has to be devalued, as the market currently fears, it presents a significant risk as it is pegged to the dollar.

The good news is that consumer debt is relatively low, but the bad news is that corporate debt isn’t and companies, once believing the Renminbi could only increase in value, have borrowed in US dollars. So their repayments would become more costly.

As China is not a democracy, the government can intervene a lot more, as we have already seen. While it took Lehman Brothers going bankrupt to make political intervention acceptable in the US in 2008, the Chinese government can do what it wants, when it wants, so it’s not inconceivable that it will be able to contain the situation and muddle through without markets facing a complete meltdown.

With share prices in China having fallen significantly, opportunities are beginning to emerge, particularly for investors willing to take a very long-term view. However, the Chinese market is so sentiment-led that it could just as easily fall a lot further as start to recover.

Read more about reasons not to worry about stock markets and why timing the market is too difficult.

UK investors who already own Chinese equities, or who are thinking about investing, should remember that while the ‘A’ Share market is the one making the headlines, many funds actually invest in the ‘H’ Share market (Chinese companies that are listed on the much more mature Hong Kong stockmarket), which tends to be less volatile.

The chart above shows the performance of Invesco Perpetual Hong Kong & China and First State Greater China Growth funds, two funds that we rate highly, compared with performance of the ‘A’ and ‘H’ share markets.

The Chinese New Year starts on 8 February, and 2016 is the year of the Red Fire Monkey. According to the Astrology Club: “The influence of the monkey puts everything in a state of flux and anything can happen. However, finances, politics and real estate should take an upturn and a lot of global economic growth can be expected.”

While I’d like to believe the second half of this horoscope, I suspect the first half may be more apt! It could be a very interesting year.

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