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China and its falling stock market


By: Chris Carter, Lovewell Blake Financial Planning Limited Date: 26 August 2015

Before looking at the reasons and immediate effects of the fall in value of the China stock market it is worth stating that when share prices are low there is a great buying opportunity. The idea of selling shares when they are at their lowest value should always be avoided – the risk being that any bounce back in value will be lost and the only thing secured is a loss.

A sharp fall in share prices in the China market has taken place. This will have a knock on effect particularly to China’s Asian neighbours and the emerging market countries such as Russia or those in South America.

The effect
Each time a country devalues its currency it makes imports more expensive and exports cheaper. The countries selling to China will either have to reduce prices or accept lower sales. This will affect commodity-rich economies. Other economies may also suffer as they compete with or sell to China.

UK
A number of the companies affected by the fall in commodities prices form a substantial part of the UK stock market – naturally these include the large energy companies, such as Royal Dutch Shell and BP, and the mining companies. The UK also has some companies, such as Burberry, which compete in developing markets. Not that many UK companies compete directly with China though. Historically it may have been considered that the UK economy did too little trading with China, this may currently be considered to be providential.

The effect on the UK markets, from local pundits, is that there remain monetary solutions to the problem of UK deflation, available to a Treasury and Bank of England, who together control the issuance of currency. As such, in the absence of inflationary pressure, the UK recovery will continue and UK stocks will reflect that. The timing of any increase in interest rates may also be further deferred and possibly we may see further quantitive easing, effectively the government pumping money into the economy, in the US.

What next
The wisdom of the great financial minds of the present and the past is worth considering at this stage. Assets are cheaper when prices have fallen, so it would be unwise to sell indiscriminately. As Warren Buffett, the successful American investor, would put it, investors should be “greedy when others are fearful and fearful when others are greedy”.

While commodity prices remain difficult to forecast the changing demographic profile of Asia’s mammoth populations provide a growing market for the finished products and continue to provide a growth opportunity that is more tangible.
To borrow a popular current phrase, “keep calm and carry on”.

But if you wish to talk this through then please do contact your usual Lovewell Blake Financial Planning Limited contact.
 
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