This morning, major news outlets are stressing the fact that China’s Shanghai Composite Index slumped as much as 5.1% overnight, extending the index drop from a 2009 high to more than 20%, the common definition of a bear market.
But this volatility should not come as a surprise to investors. The basic risk-return relationship also applies in the case of China. If you want higher returns, you will have to accept more risk. And the Chinese stock market did deliver returns. Since the beginning of the year, Chinese benchmarks lead nearly every other major index around the planet.
But this performance has a price. Since 2002, the Chinese indexes are also among the most volatile. The annualized volatility reaches 33.75 in the case of the Shanghai “B” index (open to foreigners) and 27.6% for the “A” index (locals only).
In fact, it should be kept in mind that the new bear market is the sixth one since 2002. This amounts to a bear market almost every year. In the current context of highly stimulative monetary and fiscal policy, I see the current correction in Chinese equities as a consolidation rather than a reversal of fortune.
Mounir R. El-Ayari, CIM, FCSI, C.h. P. Strategic Wealth
Associate Portfolio Manager