Overvalued Chinese shares come to a shuddering halt after hitting a seven-year peak
In August, the Chinese Government attempted to stimulate the economy by devaluing its currency (the Renminbi) and suspending trading on many stocks. The effect of this caused a tsunami throughout both Chinese and global markets, followed by significant falls in global stock markets, including the S&P in the US and the FTSE in the UK. On 24 August, the day many in the media called ‘Black Monday’, the Chinese market was down by 8%, UK markets fell by over 4.5% and the US by over 3.5%[1], with the FTSE falling below 6,000 on 22 September.
Overvalued shares
Shares in China had soared 150% in the
12 months to mid-June as individual investors piled into the rising market, often borrowing heavily to do so. But the shares were overvalued and the momentum came to a shuddering halt when shares hit a seven-year peak.
About £74bn was wiped off the value of the FTSE 100, and, on Wall Street, the Dow Jones Industrial Average slumped by a record of more than 1,000 points at one stage.
Buying opportunity
The falls need to be looked at in context of the overall picture. For instance, the FTSE 100 Index had broken its all-time high earlier this year, and the situation created a buying opportunity. It’s worth remembering what investor and mutual fund pioneer Sir John Templeton said: ‘The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.’
Professional investors haven’t been filled with panic, regardless of the situation the media has portrayed. Most of them are viewing this as a ‘market correction’ – just bringing things that have got a little inflated back down to earth.
Reasonable margin
Warren Buffett, the American investor and philanthropist, puts it very succinctly: ‘Our favourite holding period is forever.’ Over the long term, investors do experience market falls which happen periodically. Generally, the wrong thing to do when markets fall by a reasonable margin is to panic and sell out of the market – this just means you have taken the loss. It’s important to remember why you’re invested in the first place and make sure that rationale hasn’t changed.
Although headlines have focused on the decline in the Chinese stock market and the knock-on impact on other global investments, most commentators have not changed their long-term view on markets or the global economic outlook and remain cautiously optimistic on the outlook for equity and property markets, supported by an improvement generally in company profits. ν
Source data:
[1] Google Finance, www.marketwatch.com
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