A scary start
"The first trading days of 2016 have been dominated by scare stories, prompted by the 12% decline in mainland China shares over the past four days. The effects of this volatility have spread to almost every other equity market – echoing the situation we saw last August. Is there a fundamental problem with the world, and are we planning to take any portfolio action?
To the first question, we continue to believe that the world economy in general, and China in particular, are not broken. Our conclusions from our Tatical Asset Allocation (TAA) meeting in December highlighted an increased risk of market shocks this year, driven by speculation and poor headlines, rather than rational investment analysis. We are seeing one of these episodes playing out as we speak, and reiterate our views below.
To the second question, our TAA changes addressed this perceived increase in risk, principally through the addition of a US Treasury position - which we have been implementing over the past few days, and are now at half of our target weight. Extreme market movements in the short term rarely carry any useful information, reflecting instead the panic of short-term investors, most likely exacerbated by momentum trading on top."
Ben Kumar, 7IM Investment Manager
To read the full market commentary, click the PDF below.