Black Monday: market reaction continues

Graph downMonday’s fall in the Shanghai Composite Index brings its total losses to over 40% since June, sparking a global decline in markets all over the world, including Europe.

But does this mean a great chance to pick up stocks at bargain prices, or is now the time for greater caution? Those in the market seem divided on which way to play this latest shock to the system.

Heather Miner, head of strategic advisory solutions, Goldman Sachs Asset Management, seems fairly optimistic, saying that the firm continues to believe global economic fundamentals are strong despite the global market sell-off pushing major equity indexes into correction territory and causing markets to re-price risk.

Olivier Lebleu, head of international business, Old Mutual Asset Management thinks that smart beta strategies might suffer due to the recent decline in equities due to the reliance on a single factor. “We will find out how smart these products are in a bear market,” he says.

Those in the pension industry are also worried about the recent events in China. Darren Redmayne, head of Lincoln Pensions, says that the current Chinese stock market volatility that is echoing around the world shows how riskier investments can sometimes devalue, quickly.

“It is another reminder of the level of risk that pension scheme sponsors have to underwrite. It is a real life example of how market shocks like these happen from time to time and having a solid sponsor covenant enables a long-term approach to such risks,” he says.

There is more optimism from Templeton’s global macro team. Sonal Desai, vice president and portfolio manager at the firm says when investors look at the level of market panic, it could give them the impression China is headed full speed into full-blown recession. “That is not our call. While we do expect moderation in China’s growth, we continue to see it as healthy and an inevitable normalisation for an economy of its size,” she says.

However, there are some claims that the market shock was in the making for a while, due to China misreporting the true state of its financial health. Shai Heffetz, managing director of Intertrader says that in China there is a strong discrepancy between the reported economic indicators – which continue to indicate a healthy picture overall at around 7% – compared with monetary and fiscal measures which indicate a financial crisis in the making.

With further volatility ahead, it should be noted that China still has a full toolkit to try and remedy the situation. If it exhausts all of these methods, then the second largest economy in the world might be in real trouble and with that the entire global economy.

©2015 funds europe