How China fixed the markets
How China fixed the markets. Last week Chinese markets fell through the floor again. The triggers included some weaker growth figures (again) and more concerns over the global economy, namely the ability of the world to buy what it makes.
It appears to have stabilised now, but why?
Back in August the authorities prevented large holders of stocks trading — primarily selling– so that the markets would not see a large dip for the lemmings to dive off behind. That control was due to lapse on Thursday, but was deferred for 3 more months.
Yet the measure they have put in place makes that look sensible. Now large traders can buy, but are not allowed to sell without giving 15 days notice.
They have also removed the circuit breaker mechanisms that were intended to stop sell-offs like we witnessed this week, that actually seemed to make matters worse.
And the People’s Bank of China (PBOC) also moved to set the exchange rate higher. A midpoint was fixed at 6.5636 per dollar.
This means that the SSE is likely to rise, but not that all is now green in the garden. It is likely that many will never know about such practise, and therefore just get back on the band wagon.
I had mentioned in my January comment on a tip for 2016 that the iShares China 25 ETF (FXI) was on my radar. Here it is, the best one way bet since Soros nailed the Bank of England.
I am looking to buy below 34 and sell either if and when it reaches 38, or for whatever gain there is in two weeks.
That is how China fixed the markets, with the best intent, to protect its investors, and to give us a little profit and a chuckle on the way.
Why markets are falling
If you’re wondering why markets are falling, you are not on your own. Reasons are many and complex, but there is little to do as an investor when markets are falling except seize the opportunity. It’s not often that an article here features classic poetry. Yet the first few lines of Rudyard Kipling’s If sums up the qualities required for investing in the instant age we are now in.
If you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
Stockmarkets now move faster, with wild swings either way within hours. But this is no longer just the domain of the penny shares, or the lightly traded smallcap, or a fledgling emerging market; this is blue chip stocks, the biggest and most robust companies in the world.
So why has the movement become so exaggerated? Psychology. Now that everyone can react to news – that may have only the merest modicum of reality – in a moment, investors that have something to lose remain glued to the news feeds on their cell phones, ready to respond to whatever horror story appears.
There are of course legitimate fears arising from the increasing frequency of crisis or political mayhem that may well impact an industry sector, but there is also the complete garbage that is produced and circulated with the inferred authority of “it’s on the internet”. And here is where your problems as an investor really begin – some of it is believed.
I have followed the developing solar industry for a few years, watching companies that scaled themselves to service either domestic or utility markets, or just to create and supply technologically advanced photo-voltaic panels to the industry. Key to the cost benefit they offer is that the sun is a renewable energy source.
Yet in an absurd example of how a technology, an entire industry can come under fire, it was recently reported that a town in North Carolina decided not to proceed with a solar energy installation over fears that it would “drain the sun”. What’s more, they cancelled projects already under way and may close two already completed. It may be easy to swipe at the closed thinking of a small town community, but more fault lies with the poor journalism that was allowed to perpetuate the myths that concerned this town; that solar power may cause cancer, that there would not be enough sun for photosynthesis in the area, and that solar farm installations actually drain the energy from the sun rather than just receive it.
Some may have real fears. But the last point is a reflection of a story raised as a hoax back in 2012, and aggressively dismissed throughout 2014, yet the seed took root in the minds of the fearful. The really scary part is that the story was circulated over “social” media channels to millions waiting for the next apocalypse, and ready to “sell, sell, sell” at the touch of a button. How many people take stories like this at face value and believe and perpetuate them we don’t know, but you can be sure that it’s only a small percentage that will take time to find out the reality behind it and if necessary debunk it.
This is just one example of how the internet and the instant communication of social media channels can work against, or for you. The hope is that reason and logic return.
China markets are falling
China has a huge part to play in why markets are falling again. They have put in place a measure that calls for markets to close if a certain percentage movement occurs. If the markets falls 5 per cent they close for 15 minutes: if it goes beyond 7 per cent trading is suspended, presumably to allow some sanity to come from the information available. Such suspension suggests more worries and, spirals into other markets.
But it goes back in part to the collapse in August last year, when trading restrictions were placed on large shareholders. Those have now been removed, but even measured or surreptitious sales may have been noted and fuelled panic. The situation in China is much more complex than it appears, but underneath all the factors for global industrial and economic dominance are present.
And the contribution of oil prices to why markets are falling is scaring many. Technology has allowed for much more oil to be produced from what 30 years ago were considered dry wells. The world has more, and can produce more oil than it needs. Add this 2 to China’s 2 and many get 22. While lower oil may mean cheaper petrol eventually, and no chance of an independent Scotland, the industry is suffering. And because oil companies were, until Apple, some of the largest in the world, and the effect they have on markets falling is huge.
Investors are left with three choices. Either don’t get in the water, or if you are in, stay in regardless. Or you can use the insanity in your favour.
Option one won’t do for me at all, and option two I can live with. Option 3 means that I use what we know to our advantage. The most simple chart tells us where the price has been, and at what levels the price doesn’t tend to go below or beyond, what we call support and resistance. And we can use that information to set limit orders to buy during the insanity-driven volatility dips. You may find that orders go unfilled for a while, but the way markets are at the moment there is a good chance of picking up a bargain.
This and other strategies are described at Successful Personal Investing, TheSPICourse.co.uk.