Chinese Stock Market Volatility in Perspective
James C. Fletcher, CFA
Portfolio Manager & Senior Research Analyst
Kayne Anderson Rudnick
As the global equity markets have contracted sharply during the first weeks of 2016, concerns about China are at the top of investors’ minds. One of the critical questions that investors have is whether China is headed for a hard landing. We would like to take the opportunity to address the recent developments in China, provide our perspective, and summarize the approach we take to investing at Kayne Anderson Rudnick.
First, let’s take a step back and put the country into perspective. China is the world’s second largest economy and has been the primary engine of global growth for the past decade. Its importance on the global economy is undeniable, being the largest consumer of everything from cars to commodities to luxury goods. It’s also one of the least transparent markets in the world and is showing signs of stress. There are four primary factors that are currently worrying investors: declines in the Shanghai Stock Exchange, depreciation of the Chinese currency (the yuan), slowing growth, and the rising debt levels.
So while the Chinese Stock Exchange is probably still overvalued (and we highlight that the stocks in Shanghai trade at an average a 40 percent premium to the same listings in Hong Kong) and may decline further. We believe that any link between the Shanghai Stock Exchange and economic fundamentals in China is tenuous at best.
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