The first trading day of 2016 began with a sharp selloff across global markets as new signs of economic uncertainty in China exacerbated fears about global growth and the year ahead.
Authorities halted trading in mainland China before the end of its first trading day of the year Monday as Chinese mainland stocks fell 7% on worse-than-expected manufacturing data and a weakening currency. January 4th's stock market drop was the worst percentage loss for China since August 25, 2015, when stock prices declined 7.6%. In the U.S., the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all fell roughly 2% after markets opened.
January 2, 2016 data indicated that Chinese factory activity slowed in December, causing investors to doubt the effectiveness of Beijing’s efforts to boost economic growth. Further, the central bank’s decision to guide its currency lower on Monday resulted in the yuan trading at its weakest levels since 2011. Analysts also believe that the expiration expected on January 6th of a ban on shareholders selling large stakes has put downward pressure on stocks.
Late in 2015, China made plans to launch a new stock index circuit breaker system in an attempt to prevent the dramatic swings that contributed to its summer stock market crash. The circuit breaker triggers a 15-minute trading halt after a 5 percent move up or down in the CSI 300 Index, an index of 300 blue-chip stocks listed in Shanghai and Shenzhen. Trading halted for the rest of the day following a 7 percent move on January 4, 2016. The new circuit breaker system launched and was subsequently triggered. Analysts are concerned that the freeze in trading may spark fear in investors and lead to additional selling.
Volatility in commodities prices has continued due to concern over demand from China, one of the world’s largest consumers of oil, food, and metals. Rising tensions in the Middle East have also contributed to volatility in oil prices and general global market uncertainty.
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As we reminded our clients over the summer, we have minimal direct exposure to China in the portfolios we manage at Revolution Partners. We do not currently allocate to any pure China or emerging market equity investments in our model portfolios.
We are not panicked by today’s news. We remain convicted in our decision to position our portfolios conservatively as we expect many of our concerns in 2015 to continue into 2016.
As always, we will continue to monitor this situation and other market events closely and provide updates as we believe they are necessary. We are always available to discuss your investments, and please do not hesitate to contact us if you have additional questions or concerns.