New Capital sees the market plunge related more to “a downward spiral of redemption selling in emerging market funds rather than based on fundamentals and the corporate outlook”, said Mansfield Mok, portfolio manager of the New Capital China Equity fund.
The sentiment is echoed by Vontobel Asset Management. In a recent research note, the firm highlighted the streak of irrationality in the latest sell-off.
“Pundits, who scream that the Shanghai Composite Index is down a third since its top, remain silent about the fact that it is still up around 40% over the last 12 months. We strongly believe investors should continue to look at the broader picture.”
Negative news flow from emerging markets is what’s causing turmoil.
“We’ve seen multiple mentions of EM capital outflows, however, it has remained unclear which specific outflows are being referred to. As the yuan is no longer a continuously appreciating currency, with higher rates than the US-dollar, many Chinese debtors have stopped this ‘risk free’ funding trade.
“This has resulted in outflows, but comparing these flows at face value with the fast-money risk unwinding seen back in 2008 is misleading.”
Mok, from EFGAM, believes equities at valuations after the panic selling stabilizes could be a good investment opportunity for investors with a 12-month view.
He believes investor sentiment will shift in late September or early October on the back of supportive easy monetary policies and fiscal stimulus, a clearer picture of the path of US interest rates, implementation of SOE reform and an improvement in earnings after interest rate and RRR.
