Friday 15 January 2016

Shanghai Composite down 20% from highs as the bears are back in town

Chinese stock markets have entered bear territory once again following a troubled start to the New Year that has seen close to $3 trillion being wiped off from global stock exchanges on the back of concerns that the slowdown in demand in China is worse than initially thought sending investors frantically to the sidelines.

The levels that were registered today were last seen in August 2015 when Chinese stocks briefly entered a bear market only to reverse misfortunes and stage a mammoth rally after the Chinese government boosted confidence by placing a number of measures to cool off fears, one of these being an injection of billions of dollars into the market through a team assembled by officials known as the "intervention squad".

But we've seen a resurgence of volatility entering the fray when a deadline for the restriction placed on large shareholders in Chinese companies was set to expire prompting participants to dump their holdings in a frantic panic. This in effect put newly placed circuit breakers under tough scrutiny having only started to be fully operable from the beginning of the year and causing a halt to two trading sessions in less than 4 days.

The removal of these by Chinese regulatory authorities hasn't saved much face in terms of confidence in being able to appropriately respond to the need of creating orderly market conditions.

The big test from here onwards will be whether these levels are able to hold or if they may go lower which would set the trend for 2016. Should we see steadfast support of these levels I think it's fair to say that we might be encountering a market with a large range coupled with a high degree of volatility, however if prices do go lower it may trigger off another continued selloff with current support at risk of becoming resistance.

Reality Sets in for World's Biggest Miner

BHP Billiton is set to take a $4.9 billion writedown on its onshore shale gas assets as the world's largest minerals and mining producer battles to contain losses that have resulted from an extended siege on  global commodity prices. This after the price of oil went below $30 per barrel for the first time in 12 years highlighting the severity of the rout.

Analyst expect the next move by the Australian company could be to scrap or even halve its dividend in an effort to prevent further leakage seeping out of their balance sheet. The company has also recently been involved in a mining disaster in Minas Gerais, Brazil where a dam wall holding contaminated water from extracts of an iron ore mine burst and found its way down the rivers and coastline of the South American nation raising doubts over whether the company would be able to find stability in the near term.

It's peers, namely Glencore and Anglo American, have faced a much tougher battle in persuading investors that plans made for restructuring the company's balance sheets to cut back on debt and relieve demand on profits from expectant servicing of debt will be implemented to improve the outlook of the future of both these companies.

But these campaigns haven't been met with much vigor as many analysts have called into question the sustainability of such measures and whether the tight timeframe they wish to execute such a strategy may result in further letdowns to investors which has driven many to sell in heaps and put pressure on stock valuations.

We are in the midst of one of the biggest commodities crises of our time and I think the levels to which valuations have sunk too do set the stage for a grim story that lies ahead. The abnormal negative returns will place a much more demanding strength in case should an investor be convinced of investing in this space.
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