The bursting of the Chinese equity bubble has led to “savage” falls in commodity prices, according to multi-asset managers.
Having peaked at 5,166 points on June 12, the Shanghai Composite index has fallen more than 30 per cent in the past month, with some domestic stocks dropping so quickly China’s government has suspended trading on roughly half of them.
The panic in the Chinese market has now fed into commodity prices, which have been linked to the fate of the world’s second-largest economy since the commodity super-cycle of the 2000s.
Last Wednesday, the price of a tonne of iron ore slumped by 11 per cent to $44.10 (£28.60), having lost a quarter of its value in less than three weeks, while the price of oil plunged by nearly 8 per cent last Monday.
Multi-asset managers have predicted the carnage may not yet be over for Chinese stocks or commodities, however they added there may be opportunities to pick up assets as others are forced to sell.
China’s government has implemented a growing number of restrictions on the market in an effort to curb investor panic, including a measure to ban anyone with more than a 5 per cent stake in a firm from selling out for the next six months.
Its efforts only began to bear fruit last Friday after the market made small gains.
Simon Evan-Cook, multi-asset manager at Premier Asset Management, said the market drop may have fed through into commodities because investors either thought the fall was an indicator of weaker economic growth or feared the loss of wealth would directly lead to negative economic effects.
Talib Sheikh, multi-asset manager at JPMorgan Asset Management, said: “The savage moves seen [in commodity markets] in the past few days show people are recalibrating just how much slower Chinese growth is likely to be.”
Mr Sheikh said he thought commodity prices could go even lower, something he was counting on by taking short bets on the currencies of commodity-reliant countries, such as Australia.
The bets will make money if these currencies deteriorate against the dollar, which Mr Sheikh expects will strengthen.
Mr Evan-Cook said there was “more damage likely to come” in Chinese equities, though he said the volatility of the market meant a 10 per cent rise or fall on any given day would not be surprising.
Amid this uncertainty he said the Premier multi-asset team had begun to add to the Asian equity funds held within its multi-asset portfolios, backing its chosen managers to add value in a volatile market.
“We are raising exposure to Asian equities because the baby is being thrown out with the bathwater, so there are great opportunities for active managers in the region,” said Mr Evan-Cook.
The manager said he had added money to the Prusik Asian Equity Income fund and Jonathan Pines’ Hermes Asia ex Japan fund, having spoken to Mr Pines who is buying into certain Chinese stocks.
Mr Evan-Cook said because many Chinese shares had suspended trading, especially the riskiest ones, investors with high amounts of leverage needed to sell what they could to service their debts.
This meant, Mr Evan-Cook said, that some had been forced to sell higher-quality companies, including Hong Kong-listed or even US-listed Chinese stocks, presenting opportunities for managers to buy in.
