This year the Chinese economy and stock markets have fallen victim to slowing emerging market growth, trade “skirmishes” and negative investor sentiment. Economic data as seen by the Citigroup Economic Surprise Index has disappointed at the largest pace since early 2016. China’s stock market has fallen more than 30%, the worst decline since the government surprisingly devalued the Yuan in 2015. Investor sentiment as seen by inflows and outflows of ETFs is hovering near the lowest level since at least 2012. In addition, the Chinese Renminbi is down 6% vs. the U.S. dollar year to date. The Renminbi is on pace to post the worst annual decline vs. the U.S. dollar since they opted to float their currency in a managed way in 2005. With China still expected to be a driver of global growth, we looked at the recent weakness to decide if this is a buying opportunity.
For contrarian investors, the recent weakness would suggest a buying opportunity in emerging markets (mainly Asia/China). While earnings clarity is poor and momentum is weak, from an economic perspective, China achieving 6.5% annual growth still looks likely and long-term prospects look solid. In addition, while timing a bottom in a volatile asset class is difficult, the upside potential for the long run outweighs the risk of significant downside from here. However, we would recommend adding exposure in a gradual manner (and actively in EM) until there is more clarity around trade and earnings.
China sell-off overdone? Is this a buying opportunity?
Source: Data as of October 22, 2018.
Footnotes: Bloomberg Finance LP, Verdence Capital Advisors.