It?s human nature that, when some type of crisis occurs, we tend to panic; it?s a fight or flight instinct. And with the Chinese share market down more than 40% from the highs it reached in June 2015, the word “crisis” has been used by more than one financial commentator. So – should you panic about the Chinese stock market volatility? The short answer is no: volatility is part and parcel of investing in shares and it can sometimes signal a good buying opportunity.
We caught up with Michael McCarthy, Chief Market Strategist at CMC Markets, for his view on the current share market volatility. And remember- the information below is Michael?s opinion and not investment advice. You should seek the opinion of your financial adviser before making any investment decisions.
Q: Why is China?s volatility causing such an effect on our markets?
A: Excellent question. The share market in China is driven more by policy decisions from central authorities than economic fundamentals. One weak flash PMI does not a China crisis make. It?s more likely that the global sell off is related to a record breaking bull run in the US, where there has not been a market correction (-10%) since Q1 2012. This theory suggests the sell off is a correction, not the beginning of a crisis.
Q: Sell, buy or just sit tight: what should investors think about before doing anything?
A: Buy – now is the time to look at those high quality blue chip shares you?ve always wanted to own, but in the past seemed too expensive. Many investor portfolios are narrowly focused on a handful of stocks. The recent falls offer an opportunity to diversify at more attractive prices.
Q: Do you expect continuing volatility over the short term?
A: Yes. Studies of market behaviour show that volatile events “cluster” – once a period of high volatility starts, it?s likely to continue.
There are a number of potential circuit breakers that may bring the current pressure to an end. As China is the cited cause, events such as a two day rally in Shanghai, a decisive and public injection of liquidity or strong reads on the manufacturing indices could change the picture completely.