Storm in a Tea Cup ? – What you need to know

14 January 2016

Global markets continue to selloff in 2016 despite better than expected China trade data and solid Australian employment figures.We believe this highlights how negative sentiment currently is in the market and as mentioned previously we urge investors to remain calm and see the current sell-off as more of a buying opportunity. Below we discuss key points on recent trends and data. 

China Trade Data Exceeds Expectations

has been a vocal supporter of China; in that we believe it is unlikely to collapse, rather the economy is in a stage of transition from being manufacturing to consumer driven. Yesterday’s solid Chinese data helped to vindicate this view. China's exports increased 2.3% in December from a year earlier while imports were down 4%. A trade surplus of 382 billion yuan (AU$83.1 billion) remains well above the predicted 338 billion yuan, and above the previous month's 343.1 billion. The numbers were much stronger than expectations. Economists had predicted a 4.1% drop in exports and a 7.9 % slump in imports.

The key takeout from this data is that is not all bad news for China. The market is becoming overly pessimistic in our opinion and are only focusing on the negatives. We believe it’s important to take a balanced approach to investing and consider both sides of the coin.

Negativity is Elevated

Given the negative sentiment that has been surrounding markets of late, it is valuable to consider who is doing all the selling. Long term investors are likely to look through the noise and may see this as an opportunity to add cheap stocks to their portfolio. Short term/speculative investors would be the first to start selling given their inability to weather the market move. In saying that, we have notice an increasing trend of short sellers on the ASX.

Short sellers are investors which are betting that the market will fall and therefore benefit from price declines. The chart below highlights total amount of shorts on the ASX top 100 has been climbing since August last year. Total shorts have increase over AU$5 billion and suggests there are significant bearish positions being initiated. These are likely to be hedge funds attempting to benefit from long term investors misfortune. Hedge funds often have a short time frame for investing and look to take advantage of big market moves. If price falls do not materialise they will rush to the exit driving prices back up and the selling pressure is likely to abate. When investing it is important to keep the long term time horizon in mind. Although the press at the moment may be focusing on how bad the world is, the real question is where things will be in 2-3 years.

Chart of the Moment

China is still a maturing economy, and the Chinese consumer is forecast to become a bigger part of the global economy. Crown Resorts (CWN.AX) is a key portfolio holding which directly benefits from Chinese consumers (Chinese gamblers travelling to Macau or Australia). Shares in Crown Resorts bounced recently on news that James Packer, Australia’s third-richest man, is in talks to return some of his casino assets back to private ownership. We have been vocal supporters of Crown, and believed the shares were significantly undervalued when added to the Australian model portfolio. Crown’s VIP Australia turnover was up 44% at the last trading update, and as two of our key views are that  tourism and retail are set to take off in Australia, holds Crown as one of its top Australian stock picks. 

Storm in a Tea Cup ? - What you need to know

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