Chinese Year of the Monkey – Investors Should Mind the Banana Skins!

By 8th February 2016

This article was originally published on Quadrant Group’s website. Quadrant Group was acquired by Progeny in March 2017.

According to the Chinese Zodiac, the Year of the Monkey starts today, February 8th. Anyone following the financial markets might be thinking the monkey business began some weeks ago. Between suspended circuit breakers, weaker economic data, stronger capital controls and renewed currency confusion, China has investors everywhere scratching their heads.

Of course, China isn’t the only reason markets got off to a bad start this year but it is definitely a big factor (at least psychologically). We can also point to tumbling oil prices, the Eurozone debt crisis, quantitative easing in the US and UK, a failure of emerging market countries to achieve sustainable development and many other problems that have colluded global markets into a state of ripe uncertainty.

However, we need to keep these current events in perspective. Investors and consumers alike may be taking a cautious approach at the moment but it’s not all doom and gloom as reported. Sensationalist headlines, hyped speculation and inciting rumours are the raison d’etre of attention-seeking media outlets. Even such off-handed remarks like those of George Soros last week resulted in a plethora of articles that give investors the jitters.

Investors should be alerted that the real catastrophe for long-term returns is emotional decision making. Everyone agrees that the winning formula is to buy low and sell high, but time and again we do the precise opposite. The majority of private investors give in to their emotions – even the professionals are prone to it. It is worth looking ahead because fluctuations are rarely as cataclysmic as we may be led to believe.

Chinese stock market volatility has had more to do with the Yuan currency, which has dropped 5.7% since August. An economist would argue that the currency’s depreciation is both good and bad and not near the ‘hard landing’ that Soros is calculating. With the largest foreign exchange reserve of about $3.3 trillion and a government with a firm control over capital movement, China is unlikely to succumb to speculative investors. The economic changes China is undergoing may take several years but these should be put into a wider context. China experts everywhere are pointing to the country’s transition from manufacturing for export to domestic consumption-driven services. Even so, expansion of 6% GDP looks eminently possible with consumer spending, wages and employment remaining strong.

UK investors maintaining a well-diversified portfolio made up predominantly of developed market equities and high quality bonds will limit exposure to the Chinese market to probably less than 2%, depending on their investment structure.

Even with the recent falls closer to home, the UK market is up around 45% over the past 5 years and the global developed markets are up around 60% over the same timeframe. The US and UK economies are still growing strongly. Considering the usual economic measures, GDP per head is above pre-crash levels; the UK has more people in the workforce than ever before; new car registrations have reached an all-time high and petrol is 99p per litre.

When media attention is focused on short-term events we may need reminding that market gyrations are an inevitable consequence of owning equity assets. It is reasonable to think about it as two steps forward and one step back. It is the very uncertainty of interim market returns that delivers the longer-term incremental returns equities offer, above owning bonds or cash.

Disappointment and measured concern is to be expected, however any financial loss only occurs when selling out of a position e.g. selling equities when they are down. Long-term investors should remain firm and hold their assets until market conditions improve because experience has shown that given time markets do recover.

Like believing in the Zodiac to foresee life’s outcomes, it goes without saying that market predictions are not a reliable indicator of performance. Investments by nature have inherent risks and there are no guarantees. Let’s take a little advice from the Chinese sage Confucius: “It does not matter how slowly you go as long as you do not stop.” And I would add… mind the banana skins along the way.

This article does not constitute financial advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner to take into account your particular investment objectives, financial situation and individual needs. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections.

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and the value of investments can fall as well as rise. No representation is made that the stated results will be replicated.

Andrew Pereira

Director, Wealth

Andrew has been working with families, high-net-worth clients and business owners for well over 20 years.

Learn more about Andrew Pereira