Seeing through the fog of China news

One of the BBC’s senior editors was recently asked about what is happening in China and its impact on stockmarkets worldwide.

The journalist concerned discussed, briefly, how China is trying to move its economy to a more mature stage of development. He outlined its intention to create a bigger home consumer market in order to drive growth while also integrating its currency further into the world economy.

He then said stockmarkets and stock prices are predicting the future, not reflecting the present –though one could argue that it has been a case of valuations in the UK and US returning to more sensible territories.

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Given that the radio show in question is aimed at the great and the good before they go off to work to do great and good things, it might have been beneficial to explain a little more.

No one was told of China’s relevance to the commodity market, which is itself of great relevance to the FTSE 100 because of China-dependent but London-domiciled mining stocks. That said, active fund managers – or the astute ones at least – may well have done much better for their investors than the index by excluding mining stocks from their portfolios.

And no one said it is getting more and more difficult to see through the daily news fog to understand what is really happening. With most global markets dominated by short-term, highly volatile money, it is hardly surprising you get short-term, highly volatile news.

To put it another way, it would be better if the mass financial media channelled more Sergeant Wilson and less Corporal Jones, but maybe that is too much to hope for.

Yet this brings us to the great disconnect that represents a huge challenge for fund managers, discretionaries, advisers, direct-to-consumer platforms and maybe journalists – or at least the journalist who still believes that part of their job is to explain what is going on.

Clients and customers will want to know exactly what China’s current woes mean for them.

The answer is hugely complicated, given the country is undertaking an unprecedented transition as well as aiming for full integration into the world’s financial system. At the same time, China may also be paying the price for several key policy mistakes in the past five or six years that could make that transition more difficult.

It could mean there will be significant market volatility, perhaps for several years, with implications for everything – from the fortunes of almost all emerging markets to the pace of developed world interest rate normalisation and global growth as a whole. At worst, it could mean the long financial crisis has yet another chapter.

What that means tactically and strategically for client portfolios is a lot more complicated than merely avoiding direct Chinese exposure – which will be minimal anyway – or even embracing the buying opportunity.