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Last Updated : Aug 18, 2015 08:32 PM IST | Source: CNBC-TV18

China equity slide beginning of global turbulence: Rabobank

Michael Every of Rabobank says the whole equity and Yuan weakness is also suggestive that the Chinese government wouldn‘t be buying into equity as to artificially support the market.


With Shanghai Composite Index falling more than 5 percent, Michael Every of Rabobank and Ben Cavender, Principal, China Market Research Group believe this selling out is being driven by local retail investors rather than foreigners.

Both Every and Cavender think this could be indirectly positive for India, but with a rider that there are very few people who will take money out of one emerging market- China- and put it into another (India).

Speaking to CNBC-TV18, Every says the whole equity and Yuan weakness is also suggestive that the Chinese government wouldn’t be buying into equity to artificially support the market.

In this volatile phase globally, it is the safest to be in cash, says Every, adding, “This Chinese equity stress is just a start; it is going to be a much broader period of global turbulence.”

Below is the transcript of Ben Cavender's and Michael Every's interview with Reema Tendulkar and Nigel D'Souza on CNBC-TV18.

Nigel: What are you making of the ongoing situation in the Chinese markets? Currently they are down by close to around 4.5 percent, what is your sense, have you got some reading in terms of what caused this?

Every: The clearest suggestion we have is that we were approaching a key technical level previously after which the Chinese authorities have said they wouldn’t be buying. So, this is what happens when you have the government artificially trying to support the market to a certain point.

Once you get beyond that, everyone says it is time to sell and we have been optimistic, we got close to that point, now everyone is locking games in synchronisation.

It is very much a one-way market. Everyone buys in the same direction when they think the government is supporting them and when they get to the level where they think the government is not going to support them, they all sell.

So, it just underlines the fact that the authorities can’t dampen down volatility and they can’t permanently try to re-flate this market, all they can do is limit the downside to a certain extent.

Reema: When China was moving one way up in the early part of 2015, all the experts we spoke to indicated that it is the retail investors, the local people who are pumping in money into the Chinese markets and not so much as incremental money coming through from foreign investors. On the way down is it still the retail people who are booking their profits or are you getting signs of institutional people reducing their holding in China especially after the Yuan devaluation as well?

Every: I don’t think there is really clear data to actually draw that comparison very carefully. The broader picture you can see is that everyone is sceptical of the market at the moment and if it weren’t for the government guarantee, there would be even more panic selling quite frankly but equally even while that government guarantee presents a limit or a flow to how much downside we can get as we are just seeing today also presents a firm ceiling unless they say they are going to buy in perpetuity and say 5,000 points is the target that they will have for themselves rather than 4,000 which at which point we can push all the way back up to there and then everybody sells, leaving the government to basically take losses.

So, they haven’t really solved this underlying dilemma. Looking at key ratios such as the PE ratio or the price-to-book value, it is still a very over priced market in many areas and we haven’t done really anything to resolve that on underlying basis.

Nigel: We saw a lot of supportive measures that came in and that prevented the Chinese market from really slipping below that 3,700, went to around 3,500 and found support there. Now if this gets pulled off, do you think in fact we are right for a full fledged sell off?

Cavender: If you look at the market and you look at where stocks are --4.14--right now in terms of their pricing, the reality is we are so quite high compared to where we were a year ago and if you look at the PE ratios of all the companies, you can make the case that they are still very overvalued and that coupled with the fact that retail investors are now are very skittish about the market, I could absolutely see the markets heading lower.

Reema: With the weakness in China, does India look relatively better? Do you see any kind of trade taking place because money is now being pulled out of China, in any way benefitting India?

Every: Not really, not directly. There are very few individuals who say I am taking my money out of China and putting it into India because as we were saying, a lot of it is being driven by local investment rather than foreigners and if you have been burnt in China, you are not necessarily going to turn around and say I am looking for another emerging Asian giant to put my money into straightaway. So, that direction isn’t necessarily going to happen.

Having said that, nearly everything bad is happening in China in terms of dragging down commodity prices etc, actually is a benefit to India and ironically a lot of this economic strain that we are seeing in China could indirectly actually be a positive for India.

So, that could to an extent see a bid to Indian equities even though from a clear one to one shift perspective isn’t going to happen.

Nigel: The Chinese markets have been going down, at one point of time we had an inverse relation that was playing out between the Indian and the Chinese markets but now in fact it appears that the Indian markets are following suit, at least temporarily. What is your take ? Chinese markets not faring too good, could we see some shift coming into the Indian markets?


Cavender: The challenge has echoed the same response here. It is the retail investors that are driving the market in China and that person is not going to be taking his money and investing in stocks.

They are going to be looking at real estate in China or maybe trying to offshore their money through real estate investments overseas.

What is going to happen is we will see a lot of Chinese companies really coming under pressure now, having trouble paying their debts and that might cause some investors that otherwise would have been looking at investing in manufacturing or other industrial companies in China, maybe looking at India as an alternative, so in that sense there could be a benefit but I don’t think you are going to see an uptick necessarily in your stock markets because of this.

Reema: The Chinese currency Yuan has fallen by nearly three percent in the last five trading sessions. We understand that the government there is trying to support the currency but what is the view now on the Yuan, do you see a further decline or a further fall in the Yuan, what is the view say for the next three months or six months?

Cavender: We could see it continuing to fall little bit over the next six months but I don’t think we are in for more drastic days ahead. We hit the threshold where the government can be looking at things and saying, ‘look if it goes too much lower, there is going to be panic’ and the nice thing is they have tremendous amount of foreign reserve, they have a lot of control over state banks, so they can buy back currency as needed to stabilise the flow. We might see maybe slow decline over the next three months.

Nigel: Could you give us your top three asset picks at this point of time, would you be looking at gold, is there any currency that you will be looking to hide into because equity markets actually they have been quite wobbly?

Every: Gold I prefer to have in my tea than in my pocket to be honest with you and in terms of asset classes in general, right now one of the safest things to be in is cash.

We have got an extremely volatile global backdrop, enormous uncertainty on any number of different fronts and frankly what we are seeing in China really is just the start of what I think is going to be a much broader period of global turbulence.

So, there isn’t anything wrong with just taking a backseat and watching to see where the dust settles.

Reema: Now it is a six percent fall in the Chinese markets. What impact will this have on other commodities? You touched briefly about gold but what about the other commodities?

Every: It is negative for nearly all of them really, pretty much across the board. So, I don’t think we should be too surprised to see selling pressure that we have already being experiencing accelerate. Having said that though, bear in mind that we are already starting to get used to this kind of volatility in the Chinese markets.

The particularly bad day again really underlying that structurally China hasn’t dealt with the other with the other pricing of the market but at the same time we have seen plenty of days over the past couple of months with exactly this kind of volatility and I don’t think one fresh one is going to change the overall dynamics.
First Published on Aug 18, 2015 01:13 pm
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