Friday 26 February 2016

Chinese stocks plunge, emerging markets "trade of decade" or global recession coming?

Chinese stocks plunged on Thursday but the rest of the world shrugged off the decline.

The Shanghai Composite Index tumbled 6.4 percent, its worst one-day decline since 26 January.

"The key reason [for today’s slide] seems to be a tightening in monetary conditions after the overnight repurchase rate rose 16 basis points to 2.12 per cent. Tighter liquidity in general is not supportive of Chinese stocks,” Audrey Goh, investment strategist from Standard Chartered Bank, said.

However, elsewhere, the S&P 500 rose 1.1 percent, the STOXX Europe 600 jumped 2 percent and the Nikkei 225 gained 1.4 percent.

Despite the plunge in Chinese stocks on Thursday, HSBC’s head of Hong Kong and China equity research Steven Sun expects the Chinese market to rebound over the coming months.

Indeed, Research Affiliates LLC, a sub-adviser to Pacific Investment Management Co., considers emerging-market assets as a whole “the trade of a decade”, while BlackRock Inc., Franklin Templeton and Goldman Sachs Asset Management are also turning bullish on emerging markets.

In contrast, John-Paul Smith, the founder of research firm Ecstrat Ltd., sees no sign of a turnaround for emerging markets and says the current environment resembles that of the late 1990s, when Asia and Russia were hit by financial crises.

However, it is not just emerging markets at risk. Citigroup Inc. says the chances of a global recession are high and going up.

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