MARKET MOVER REPORT – China in Focus Part II

13 January 2016

Global equity markets have had a volatile start to 2016. China has featured prominently in the press as of
late and has been at the centre point of the global selloff. believe the China story is one of
transition (manufacturing to consumer led economy) rather than a complete market collapse
. are
running a multi-part series on the changes facing China in 2016 and their impact on China and the rest of
the world.

Part II: The Chinese Equity Market

What has Happened?

The Chinese share market dropped over 10% in the first week of 2016.

A major driver of the selloff has been attributed 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. Investors are concerned that this will result in large price
declines and instead have attempted to sell ahead of these moves. The lifting of the
trading ban is scheduled to be removed this Friday.

New circuit breaker on its equity market have been also added to the volatility the
market has experienced. 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 takes effect after a 5% decline in the share market index, which
creates a 15-minute trading halt. After a 7% drop the market is closed for the rest of
the day. On Monday, 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

The new ‘safe guards’ appeared to have caused more volatility and uncertainty than
expected. Investors rushed to sell once the initial 5% circuit breaker was triggered, as
they attempted to exit the market before further price declines occurred. However,

13 January 2016

the rush of selling appears to have resulted in a much worse outcome than without
circuit breakers in place.

The charts above put the recent moves in context. Despite the fall in the equity
market of late, current index levels have only corrected to levels that the market had
achieved at a similar time last year (3500 at the start of 2015). There was a period of
hysteria last year where the CSI rallied by almost 100% in a very short time. The latest
share market correction has now corrected for this. China’s high concentration of
individual investors (retail investors) makes its stock-market notoriously volatile.
Most sophisticated investors have avoided Chinese market for this reason.
Consequently, the global wealth is largely unaffected by these moves, rather it is only
the Chinese retail punter who has felt the full brunt of the market correction.

13 January 2016

The stock market itself is made up of primarily unsophisticated retail investors who
are typically speculators and therefore overhyped valuations are common. The stock
price correction has more to do with valuations coming back in line with reasonable
estimates rather than a material slowdown in the economy.

What is the Impact?
The stock market has a heavy retail investor composition who account for more than
80% of on market transactions. As a result speculation on stocks has become
common rather than focusing on investing and wealth creation. Because the market
is mainly composed of Chinese retail investors, the impact on global wealth is limited.
Hence, other than negatively impacting on sentiment, it should have a limited impact
on wider global economy in the longer term.

It is important to note that the Chinese equity market is actually a poor bellwether
for the general economy. Accordingly, the decline in the equity market is not
reflective of weakness in the real economy. Chinese equity market moves should
therefore not affect the outlook for global economies.

What is Expected?

Volatility is set to remain high. This is likely to cause other global equity markets to
react in a similar fashion. Typically in volatile periods, investors tend to sell risky
assets in order to limit losses. However, believe this presents a period of
opportunity for savvy investors. The general panic causes mispricing within asset
classes. Good companies are wrongfully subject to the same selling pressure as the
general market. This can lead to companies with no or limited exposure to the event
becoming mispriced or undervalued. Our philosophy is to identify these companies
and take advantage of the mispricing.

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13 January 2016

Global equity markets have had a volatile start to 2016. China has featured prominently in the press as of late and has been at the centre point of the global selloff. believe the China story is one of transition (manufacturing to consumer led economy

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