'China scare' the new normal for stock markets in 2016

Singapore

MERELY into its sixth trading day of the year, the stock market's new normal in 2016 appears to be getting old. China-sparked bleeding equities, falling oil prices, geopolitical rifts and higher US interest rates - all the very same scares of 2015 look set to persist.

"The start of 2016 brings a sense of deja vu . . . equity markets are jittery and bond yields are trading lower," said Citi Research.

On Monday, Asian bourses once again found themselves awash in red. Singapore's benchmark Straits Times Index tumbled 42.4 points or 1.5 per cent to finish at 2,708.85 - some 24 per cent lower from its April 2015 high of 3,550.

Chinese equities also extended their slump, with the Shanghai Composite plunging 5.3 per cent, while Hong Kong's Hang Seng shed 2.8 per cent.

The beating suffered by equities has spared none; so far this year, Chinese stocks are down 15 per cent; broader Asia, including Japan, down 3-7 per cent, while US and European stocks have fallen roughly 6 per cent.

AXA Investment Managers attributed global stock markets' "horrific start" to two events - the China "scare" and mounting tensions between Iran and Saudi Arabia.

The question on everyone's mind is whether the meltdown is overdone and the general response to that appears to be "yes", not least because there ought to be comfort that China is armed with a great deal of arsenal to prop up its economy.

China is not on the verge of collapsing, said AXA Investment Managers: "The sell-off will soon appear as what it really is - a scare. Growth is slowing, profits are squeezed and deleveraging is painful - yet, this is neither new nor unmanageable."

However, given the delicate backdrop of the global economy, investors don't seem to need a big shock to run for the hills as has been the case in this year's trading so far.

For those intent on staying invested over these volatile times, "careful" and "selective" behaviour is what analysts advise, or in other words - head for the never-run-out-of-favour dividend stocks.

China has become the biggest trigger for the market rout this year after Beijing moved to further devalue the yuan to kick-start a slowing economy as the currency has risen against major global currencies, making its exports less competitive. That has come at a cost.

"Using currency depreciation to stimulate growth is a double-edged sword," said Kamel Mellahi, Warwick Business School's professor of strategic management. "A weaker yuan will help boost the country's sagging exports and help economic growth, but it will also increase the risk of capital flight, making investment in the stock market less attractive."

Last week, circuit breakers were used to halt trading twice following the Chinese markets' erratic plunge, but it drew criticism and was blamed for causing more panic. This in turn led to a rout in global markets.

Mr Mellahi suggests that investors get used to more wild swings in the Chinese stock market as the world's second largest economy undergoes a "very delicate transition".

But it's not the Chinese equities, where easily spooked herd-like retail investors make up a large portion of trades, that is the big concern - moreover, most economists shun the view that the stock market reflects China's economic cycle - but it's the currency.

Granted, the change in China's foreign-exchange policy (to devalue the yuan) is not "unreasonable" given that it has appreciated by 25-30 per cent against most other currencies since 2010, say analysts.

The big worry however is the impact of the "competitive devaluation" on other currencies, global inflation and China's demand for commodities, said ABN Amro.

Also, while the US Federal Reserve is expected to raise its rates again in March, it is also expected to closely watch for signs of stability in the Chinese currency which accounts for a significant 23 per cent of the trade-weighted dollar.

Citi Research pointed out that despite some similarities to early 2015, there are a number of things that make it more nervous now.

"Although the FOMC (US Federal Open Market Committee) has now engaged, it has not removed uncertainty," said Citi, elaborating that the shift in its reaction to global events and market moves has arguably reduced transparency.

The other factors, it added, include a "broken" emerging markets' growth model (they cant fend off external shocks with fiscal policy as countries are not tolerant of higher public debt while credit policy may not help given the already high rise in credit stock) and China's growth prospects.

While much of China's slowdown woes - albeit soft versus a hard landing - are not unexpected, the recent rout in Chinese equities has caused alarm.

"The solution here is for Chinese policymakers to get in control again. Experience suggests that they will, but this could take some time as to some extent it's a trial-and-error process," said ABN Amro.

READ MORE: Little evidence China's outlook has darkened dramatically: analysts