Crisis in August and the role of China in the current markets

This summer was especially stormy in the financial markets. The cocktail joined two ingredients:

  • First of all, the unending Greek crisis, which played its last show in July after the failed referendum. It is still doubtful if the last bailout will solve the problem or just delay it.
  • Secondly, the Chinese crisis. This is more important, as it showed that China has already a big influence in the world economy and finances. As it is explained by The Economist, the world became nervous. China is already a very relevant benchmark for investors.

The Chinese crisis has shown that the development in the world second (for a short term) largest economy is still weak, as it needs the strength of several institutions and mechanisms, besides its own model. The surprising devaluation was the signal that investors had to flee. However, as the T-Report chart shows, the performance of the Shanghai market is 41% higher compared with August 2014.

1-year chart of Shanghai Exchange

The problem is not limited to China, because the country is one of the main debt holders, commodity consumer and investor in emerging markets. As the dominoes, the pieces begun to fall:

  • The price of commodities is in the lowest point for years.
  • The emerging countries set the alert, as the outlook is that the Chinese commodity demand fall. Then, market evolution and economic forecasts began to be quite negative.

In the middle of this storm, the Federal Reserve showed doubts about the anticipated decision of hiking the rates. Under the current market conditions, the monetary institution thinks that this decision could be worse for future economic developments.

But the question for a common investor is: what can I do? Debt from developed countries offer low interests, developed exchanges drop and emerging exchanges, which formerly could help as an alternative, are even worse. Even China, which sailed in the middle of the Great Crisis with some success, shows its feet of clay. Then, what?

Comparative T-Advisor chart with 4 main exchanges

An investor strategy should be focused on capital preservation. These were our results in the T-Advisor European model portfolios, following this strategy:

Exchange

Loss in the last 30 days

Model portfolio loss in the last 30 days

DAX

-12.47%

-6.22%

IBEX 35

-11.3%

-7.42%

FTSE 100

-9.34%

-0.94%

The only solution in the current market turmoil is clear: good information about assets, tools to select the best ones, rebalancings and a strategy centred in capital preservation to reduce possible losses.

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