Sentiment is driving China market weakness rather than fundamentals, advises Wilfred Sit, Chief Investment Officer – Asia at Baring Asset Management (Barings).
Investors’ confidence in China has been deeply affected by issues such as the expiry of the lock-up period, concerns over the value of the Renminbi and the government’s market intervention.
Also, the trigger point of the circuit breaker mechanism, which suspends trading on China’s main stock markets if stocks fall below 7%, is set too low and far below other Emerging Markets.
Unfortunately, it did not help cool down the market but create panic.
Notwithstanding, while there is no doubt that China is experiencing an economic slowdown, it does not mean that it is entering a recession.
In contrast, we believe that China and other Asian markets are cheap despite the weak market sentiment. Investors should tap into the buy-in opportunities if the market drops.
2016 will be a challenging year but we believe there are strong entry points for investors, even more so if the market should continue to fall.
To regain investor confidence in China in particular, more transparency and communication are required from the regulators in China.
One key, highly positive development has been the China Foreign Exchange Trade System (CFETS), which has introduced a yuan exchange rate composite index that describes the relative strength and movement of the Renminbi (RMB) against a basket of foreign currencies.
The introduction of the index provides quantitative indicators for market participants to observe exchange rate movements, and offers a more comprehensive reflection of market conditions.
This removes the notion of maintaining the value of RMB against one single currency peg system of the US Dollar, which has been used for the past 10 years during the foreign exchange reform in China.
In terms of investment opportunities, stock selection has become even more important.