The following is an excerpt from David Lebovitz, Global Market Strategist, J.P. Morgan Funds. | January 19, 2016 | Barrons.com |
Many investors hoped that the turn of the year would bring answers to some of the questions that plagued markets in 2015. What is going on in China? When will oil prices stabilize? Is the stock market trying to tell us something? However, much to their dismay, 2016 seems to have brought with it a new set of questions, as China remains in the headlines, oil prices have declined further, and equity markets have been volatile. So what is an investor to do? Determine whether the facts have changed, and if that warrants an adjustment to one’s investment thesis.
Recent China sell-off—driven by sentiment or fundamentals?
We know the Chinese economy has been in transition; that is what led to a sharp decline in equity markets during August and September of last year. But what has changed since then? The Chinese economy has continued to expand at a modest pace (around 6.5% according to the government), and the transition from an investment-driven economy to a consumption-driven economy has continued to play out. At the current juncture, China is a two-speed economy; manufacturing is struggling due to overcapacity and weaker external demand, but the services sector is gradually expanding. In other words, the facts have not changed, and the recent sell-off in Chinese equity markets seems to have little if anything to do with underlying growth. Rather, it appears to be the result of a retail-heavy investor base that trades according to sentiment rather than fundamentals.
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