Thursday 27 August 2015

Questions and Answers on recent market plummet

1) As far as you know, what caused the global stock markets plummet yesterday?

It seems like everybody is pointing their fingers at China now. It is easy to blame Chinese economy stock market for the worldwide stock market rout. But people do not realise that China's economy has been in a bad shape all this while. Their economy has not recovered ever since 2011. Last year, China stock market went berserk not because of the good economy. It went crazy because of their series of economic stimulus employed by the government. 

But what is so different now compared to last year even though the economy has not improved? The difference is that nobody believes in the economic stimulus anymore! 

On Wednesday after the close of trading in Chinese markets, the People’s Bank of China said it would inject $21.80 billion into the financial system. That follows the central bank’s interest-rate cut on Tuesday.

Yet Shanghai composite has dropped around 600 points from monday to wednesday.

However I would like to point out that this is a normal phenomenon of a bull market in its second phase. It is normal. Valuations have flown so high that it is not sustainable. The economical reports and earnings have not caught up with the pace of the stocks. Consolidation is needed.

My opinion is China is now in a consolidation phase. It needs to wait for the stimulus to take real effect and be reflect on the fundamentals. I am not worried about China bad economy now. With time, I am very optimistic it will get better. For long term investors, this is another great chance for those who missed the China runaway bus last year. You wouldn't want to join the bus when it is 5000 points again.

I think the recent uncertainty is not only because of China, but also because of the uncertainty of interest rate. Money is flowing out of stocks and commodities, assets that are considered more risky. However I do believe if FED chairwoman Janet Yellen give a clearer indication about interest rate next month, there is a good chance of a rebound.

2) In your opinion, what should retail investors do now?

Contrary to what others might believe, I still think that we are in a bull market. Fundamentally I can't see a bear market coming yet. The banks are in a good shape and are not over leveraging. US property prices are still far from its heights but improving. US interest rate is still kept at 0-0.25%, meaning liquidity is still in the market. China, Europe and Japan are still injecting funds into the market. China has pumped money on wednesday. You think that will be the last time we hear about injection of funds? Definitely not. 

I would advise retail investors to do some homework to look for good growth stocks that still shows consistent earnings. These might be the stocks that bounce back quickly once the market panic is over. 


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