China’s Volatile Market: The Year of the Bear

stride-chinas-volatile-market-the-year-of-the-bear-featured.jpgOn Wednesday, the Shenzhen Composite Index 399106, -4.18%  fell by 0.8%, and the China’s Nasdaq-style ChiNext 399006, -4.56%  was down by 0.5%. (Source: MarketWatch).

China’s market has closed several times already this year, even claiming its shortest trading day in 25 years, and it’s only the beginning. While they might tell us it’s the year of the monkey, It’s quite clearly the year of the bear.

It’s not something new that China’s stock market gets a bit shaky every now and then. But now that China has risen to the grand title of the world’s second largest economy, it means something different for the rest of us. The world is rocking in its shaky wake, as many Western and European companies now depend on China, which means that many global investors do too.

As always in volatile times, you can’t be too sure what the market is going to do right now… but the trend seems to be pushing for a long-standing bear market rather than a bull market. China’s stocks are fluctuating as never before, shocking the market into differing reactions. Some say sell, some say hold, and several are pushing to buy.

But to analyse which reaction is most appropriate, we first need to understand why the Chinese market is so volatile at the moment, and then discern what to do with that information.

Okay, tell me why?

China is the world’s second largest economy and its stock market is still under developed. China is, shall we say, a “not-so-transparent” state, which means that businesses are not required to release their financials at all. This makes it difficult for investors to track stocks and to understand the market… which has caused 85% of China’s trades to be accounted for by retail investors (personal investors), unlike other global markets that are dominated by informed institutional investors (mutual funds, banks, hedge funds, investment advisors, et cetera). This abnormal state of China’s market, dominated by small, personal investors, has a massive influence on the scope of volatility.

So, the why of this market volatility really comes down to how China’s stock markets and economy have been managed in the past, and how they are currently being managed. It’s true that they are in the process of reforming their stock market and economy, but no major reformation is going to happen overnight. Particularly not in an under developed market.

China’s abnormal market structure hasn’t changed much. It is still likely to be volatile, and will likely have this nature about it for some time. 

So, what should I do?

Don’t panic. In 3D value investing, you will never be told to sell when the market is volatile or crashing. That’s because value investing is about the long-term – it’s about investing in businesses that you are sure will bounce back after volatile market conditions. So yes, if you’ve followed the rules of 3D value investing, it’s safe. In fact, you might even think about searching to buy currently undervalued stocks that are ripe for long-term investing opportunities.

While there are rumours that China won’t be able to reach its growth targets, and while it’s true that their stock markets are worryingly volatile, it’s no concern for value investors. You should be confident enough in your long-term decisions to not panic. Rather hold onto your stocks and wait out the wild seas. Perhaps even approach some new investments while they’re going cheap. 

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Topics: STRIDE, 3D Value Investing


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