Daily : At The Moment News
5 January 2016
Global equity markets sold off sharply overnight as the Chinese share market sank almost -7% triggering a
trading halt in China, testing new market circuit breakers on their first day. Weak Chinese manufacturing
data once again spooked investors in regards to China’s economic strength causing the biggest rout since
August 2015. The sell-off created a ripple effect across global markets, with European markets falling
particularly hard. In our 2016 outlook report we expected Chinese economic strength to once again be a
driver of markets in 2016, although the sharpness of yesterday’s fall has surprised us. Our forecast remains
for stabilisation of Chinese growth into 2016 somewhere between 6.5%-7.0% and we do not believe the
Chinese economy is on the verge of collapsing. In today’s daily we reiterate our views on China, and our chart
of the moment is agricultural company Elders (ELD.AX), which is leveraged towards Chinese protein
consumption.
At The Minute insights
China Chaos
What Happened
Yesterday China implemented a new system-wide circuit breaker on their equity market. A circuit breaker
has the intention to stop the market trading, give it time to revaluate and if trading volumes are thin, allow
more market participants to enter the market to attempt to stop the market selloff. The circuit breaker
took effect after a 5% decline in the Chinese share market index, which creates a 15-minute trading halt.
After a 7% drop the market is closed for the rest of the day. After hitting the limit of 5% and reopening after
15 minutes, it took roughly 2 minutes to hit down 7%, which triggered the final halt and closed the market.
Sell-off Excessive?
Yesterday saw Chinese growth concerns brought back into the limelight as weak Chinese manufacturing
data once again spooked investors in regards to China’s economic strength. The Chinese December
manufacturing survey was announced at 48.2 which was slightly below expectations (a number below 50
indicates manufacturing activity is contracting). Although it was not a material decline and we already
were aware the Chinese economy is slowing, it reiterated the growth concerns that the market had in
2015. While the data was relatively weak, we believe the sell-off was over amplified by herd behaviour by
Chinese investors. Individual investors in China, who drive more than 80 percent of trading, may have
rushed to sell to avoid getting stuck in positions after the market was closed. A major driver of yesterday’s
selloff also relates to the unwinding of emergency measures that the Chinese government had put in place
last year. Mainly, investors fear the proposed lifting of insider selling and allowing restricted stock holders
to sell on previously halted stocks will result in large price declines. Because of this, investors have sold in
anticipation of the lifting of the selling ban on stocks. The lifting of the trading ban is scheduled to be
removed this Friday.
Our China Outlook for 2016
We believe 2016 will see a stabilisation of growth for China, following the massive stimulus measures
implemented by the Chinese government last year. Our view is that the Chinese economy is certainly not
on the brink of collapse, and an expected growth rate of around 6.5% – 7.0% for next year will be supported
by further stimulus from the Chinese authorities if required. Further, we believe China’s economy is in a
multi-year transition highlighted by an improvement in data around the services sector, which is
outperforming and actually generates more jobs than manufacturing.
Chart of the Moment:
Elders (ELD.AX) shares are up over 100% over the last 12 months and have contributed significantly to our
portfolio returns, as the business restructured itself and benefitted from a perfect storm of operating
conditions. A recent development of note around growth prospects for the business was that the first
shipment of live slaughter cattle from Australia to China under the new Free Trade Agreement was shipped
in September. We see this as a key milestone not only for Elders, but for the industry as a whole and fits
with our longer term outlook for Australian agricultural businesses’ such as Elders.
Five Things Markets Will be Watching this Week
1) How global equity markets will trade in the first week of the year, and particularly whether they
can reverse recent losses.
2) Chinese manufacturing data has recovered somewhat of late, and further data will be released
early this week.
3) US employment data will be released later in the week, and the market will look for continued
strength to support further interest rate hikes by the US Fed.
4) The Oil price – whether the free-fall in the oil price will halt or reverse will be important for both
energy stocks and market sentiment more generally
5) Dairy prices will be released early in the week, with a recovery important for several agricultural
stocks held in our portfolio.