Today is being called the “Black Monday” of China by some. The Shanghai Composite is down 8.5% and a global equity markets are all red with the FTSE, Nikkei and Hang Seng all down around 5%. The S&P500 and Dow Jones Industrial Average (DJIA) both plummeted over 5% as US markets opened but at the time of writing recovered around half these losses. The US ten-year Treasury yield is back below 2% but higher grade corporate credit on average was still off nearly a point.
The allusion to today being “Black Monday” by Chinese news agency, Xinhua, is certainly provocative but far from foretelling. The 8.5% fall is the largest in the composite since end-February 2007, when it fell over 8.8%, and has erased all gains so far this year. But if the move is surprising to the Chinese financial press, they clearly haven’t been reading their western contemporaries who have been calling this for this adjustment for many months now; citing many individual examples of obvious overvaluation and speculation in the Chinese equity market. They have been placing blame on the unregulated euphoria in the domestic Chinese investor base, many of whom have run headlong into margin trading. Although this is only one factor affecting the recent bubble and present adjustment, such momentum is easily disrupted, and the improvements in regulation could be considered one of the main catalysts for market doubts once the direction turned back in mid-June.
For the older investors amongst us we may primarily think of “Black Monday” as part of the crash of 1929; begun on “Black Thursday and succeeded by “Black Tuesday” each of which saw double digit percentage losses on heavy trading of the DJIA. Others amongst us know “Black Monday” refers to the crash of October 19, 1987 when the DJIA fell over 22%. We do not consider today an eastern equivalent to those western recessions. However we do believe that this is another signal that global growth expectations and equity valuations have been imprudent. This more bearish economic outlook has already pushed Fed rate rise expectations back further and should favour higher grade credit in low net debt regions that are not as vulnerable to or dependent on external creditors, who in such times are more reluctant to extend additional high-risk credit. As deleveraging continues creditor nations should benefit from a repatriation of capital and as growth expectations dampen we believe higher grade value credits continue to offer the best risk reward profile.