60 seconds with Craig Botham on China volatility and currency depreciation
The outlook for China’s economy remains opaque, but Craig Botham says recent market volatility has been driven by technical factors and a big devaluation for the currency remains some way off.
Technicals drive China slide
The year started off very poorly in the Chinese market. Equities fell 7% on the first day of the year and continued to fall over the next few days.
Furthermore, some weak data triggered concerns of a new leg down in the Chinese economy.
In our view, the market leg down has been mainly driven by technical factors and has almost no relationship at all to economic fundamentals.
As we saw in the rally at the start of last year and the subsequent slump, it has been driven much more by sentiment and speculation than by any real solid economic data.
Big devaluation on the cards?
The other potential area for concern is the currency.
We have seen a great deal of depreciation, particularly compared to the historic standard for China.
Investors are worried that we will see a big devaluation.
We think that a gradual depreciation is more likely, but this can still be quite negative for the world economy, because it means you can get deflation exported from China to the rest of the world.
But still, the more disruptive scenario of a big devaluation seems some way off.
Important information: The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors. Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.