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Falls in Chinese equities

This week’s falls in Chinese equities are due to worries about the Chinese currency, fears about prospects for Chinese manufacturing and further Fed rate hikes, and ironically also to measures taken to stem volatility.

Chinese ‘A’ share markets have hit the 7% ‘circuit breaker’ twice in the first week of the year, with trading being halted as soon as the fall had reached that amount. The Old Mutual Pacific Equity Fund, Old Mutual Asian Equity Income Fund and Old Mutual China Equity Fund do not directly invest in the Chinese ‘A’ share market.

Chinese domestic investors have clearly been spooked about the pace of devaluation in the renminbi, the Chinese currency, just before the equity market began trading. The onshore currency rate weakened 0.5% in today’s fixing, which also saw a sell-off in the offshore rate for the renminbi. The onshore rate has been lagging the offshore rate last for several days and there has been increased focus to keep them more aligned: this was one of the issues identified by the International Monetary Fund regarding including the renminbi in its Special Drawing Rights (SDR) basket, a virtual currency that values IMF reserves.

Nervousness has also been affected by recent Chinese PMI business survey figures that were slightly weaker than expected and revived concerns about prospects for Chinese manufacturing.

China’s equity market circuit breakers are designed to help manage market volatility in domestic ‘A’ shares. A move of 5% in the Shanghai and Shenzhen CSI 300 index triggers a 15 minute halt in trading; and a move of 7% triggers a close in the market for the day. These new circuit breakers have created some uncertainty and may ironically have contributed to panic as investors worried they might not be able to sell after a circuit breaker was triggered. On Thursday there were reports that the circuit breakers had been suspended.

Increased volatility in equities at the start of 2016 was to be expected in the wake of an increase in interest rates by the US Federal Reserve (Fed), in our view. However, trading in federal funds futures suggests a probability of only around 5% of a further rate hike by the Fed in January, and of less than 50% for a hike in March, according to Bloomberg.

In managing the Old Mutual Pacific Equity Fund, Old Mutual Asian Equity Income Fund and Old Mutual China Equity Fund, we will take advantage of the opportunities presented when we believe stocks have been hit unjustifiably hard in the short term, and we will either use cash or reallocate from better performing areas.

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The views expressed by external contributors are not necessarily those of Old Mutual Wealth or Old Mutual International.

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