Investors adjust to China’s lower growth outlook

Global markets remain volatile as investors adjust to China’s lower growth outlook. Chris Ralph (pictured), Chief Investment Officer at St James’s Place, provides a professional investor’s perspective…

The blame for the dramatic falls witnessed in global share prices can be placed firmly at the door of China. With an economy growing at around 7 per cent a year, one might think there’s little to worry about – especially when compared to the comparatively anaemic GDP figures of the US and UK, which stand at 2.3 per cent and 2.6 per cent respectively. However, whilst both Western economies appear to be over most of the major hurdles experienced in the aftermath of the financial crisis of 2008/09, and are on an upward trend, China’s GDP growth has been in a state of gradual decline for five years since peaking at around 12 per cent a year.
 
This slowdown in the pace of Chinese expansion has been well understood for a number of years. However, a combination of disappointing economic data, recent excessive share price rises, and thin trading volumes at the height of summer, proved a potent combination to put first the Chinese stock market, and then global markets, into reverse.
 
Whilst investors have enjoyed a gradual upward move in international equity markets over the last 12 months or so, the Shanghai Stock Exchange Composite Index had surged by more than 155 per cent since May 2014. This has been fuelled by a government-sponsored market access programme that encouraged many local, first-time investors into the market, creating a boom to rival that of tech stocks at the start of the millennium. Whilst experienced investors may reflect on the adage that what goes up must come down, many local investors panicked and dumped recently-acquired shares when it became obvious that the government’s attempts to prop up an overheated market were unsuccessful. The People’s Bank of China has responded to the continued fall in share prices by further cutting interest rates in an attempt to stimulate economic growth.
 
Just 20 years ago such developments would barely have caused a ripple in international markets, but with China now accounting for around 15 per cent of global GDP, a slowdown in the
largest engine of global growth was bound to have some knock-on effects.
 
Accurately predicting short-term market movements remains highly speculative and prone to failure, and it would be foolish to suggest that further falls in markets are unlikely to follow in the days or weeks ahead. That said, it will have come as little surprise to experienced investors that a number of markets have rebounded from Monday’s sharp loss. As we have stated in the past, so often the best days to invest follow the steepest falls.
 
However, unlike previous market slides, we believe that things today are in broadly positive shape and that there are reasons to think opportunistically or, for those currently invested, to remain confident that they can ride out the storm

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