The crash of Chinese stocks in early January 2016 saw the value of equities fall not only in China but across the globe as well. Reminiscent of the China stock market crash in mid-2015, once again it was private investors who suffered the greatest financial losses. In fact, stocks in China fell so dramatically – as much as 43 per cent over summer 2015 values – that trading was halted for the first time ever.
This year we are likely to see severe bouts of turbulence in the Chinese stock market with reverberations around the world. – Director of ETF Research, Zacks Investment Research
After a 7 per cent tumble in the CSI 300 Index that eliminated $590 billion of value and erased nearly all of 2015’s gains (the Shenzhen Composite fell 8 per cent), Chinese officials were forced to intervene and take unprecedented measures to prop-up China’s under-performing stocks. In response to the volatility in China, the Dow Jones Industrial Average declined by as much as 467 points, and briefly fell below the 17,000 level for the first time since October 2015. Show more signs of trouble for equities, the S&P 500 lost 1.5 per cent and the Nasdaq dropped 2.1 per cent.
Wall Street has an old saying: “As January goes, so goes the year.”
The Chinese stock market’s drop on January 4th, 2015 caused a decline in commodity and equity prices around the world; ultimately erasing $3 trillion in value from global stocks. Make no mistake, the dangers to stock market investors are far from over. There is still substantial debt embedded in China’s equity markets that will have to be unwound eventually. Looking ahead, the forecast for international stock market performance is gloomy too. According to the Howard Silverblatt of S&P Dow Jones Indexes, 72 per cent of the time U.S. stocks finish the year in much the same position they began in January. This is bad for the stock market, but good for hard assets like gold.
Gold rose nearly two per cent after a wave of risk aversion investing was fueled by growth worries in China and rising tensions in the Middle East. Some analysts believe that this trend is likely to continue, and that values will rise to $1,200 or $1,300 an ounce by the end of 2016.
Hard landing fears in China are legitimate. And what happens between Saudi Arabia and Iran is a big unknown … It’s possible gold could outperform stocks this year because of the uncertainty. – Chief Investment Officer, BMO Private Bank
A sharp increase in the gold market most often signals that investors are worried about the state of more volatile asset classes, like stocks or bonds. Given that investments in gold and other precious metals very often do well during times of fear and volatility, it makes sense for gold to be performing really well, while other assets are struggling.
Bullion, which is commonly regarded as one of the most dependable alternative investments in times of political and financial uncertainty, is clearly benefiting from an “investor shift away from risk” during the ongoing economic uncertainty in China, as well as the volatility and escalating tensions in the Middle East.