The recent crash in Chinese stocks is unlikely to upset other markets but may have more downside to go until longer-term institutional investors help set a new price floor, Robin Griffiths, Chief Technical Strategist at ECU Group in London, told Financial Sense Newshour this weekend. Full audio interview can be found on the Newshour page here or on iTunes here at the 18:30 mark.
Robin Griffiths: "I do think it is quite important to get China into the correct context. When the Chinese market ran up into the Beijing Olympic Games that was a real bubble and when it bust from there that was a real crash. And you didn't have a missing decade but you certainly had a missing 8 years after that.
Now the current run looks the same but it's quite importantly different. The run-up in the last 12 months was 140% and in the last 6 months it was 100%, so that's definitely a bubble. And the recent 30-odd percent fall is definitely a crash so we can use those words quite legitimately but the implication is, is anyone expecting another missing decade in China? Well, they're not going to get that because the position in Chinese economic life that the stock market holds is completely different from what it is in the West.
Firstly, the value of the Western stock markets are typically more than the value of their economy in a single year. Whereas it is about 20% in China. Secondly, the average investor—you and I in the western world—we have a lot of our wealth associated one way or another with the stock market whereas in the case of China it is about 6%. It really isn't a big proportion of anybody's assets.
Now what's just happened is literally in the last few months, thousands and millions of new young people of the average age of 26 opened up investing accounts, borrowed a lot of money, treated the thing like the casino at Macau and have lost that money. These are what we would call weak immature hands and getting rid of them out of the stock market is ultimately quite healthy.
I think it's important to realize that the regime has not lost control and that really big players—the big banks and the big corporations—are not really in the stock market and we foreigners aren't allowed to be big in that market yet and yet we can all see what its economy has been and will continue to do.
So probably my forecast is this: we have the pullback, which fell to the 200-day moving average, and it bounced well off that. This rally you could call the dead cat bounce. It'll last a bit longer, maybe 2 weeks...and then the market will fall back again to a level that turns out to be the proper low, which I think is lower than where we've just been, which for the Shanghai composite I would say is around 3000...
Banks will be compelled to step in and take out these young players who should never have been there in the first place and then the stock market will start relating to what the economy is doing again. And the economy isn't growing at 7% but it probably really is doing 5.5% and...I think you'll find that the big financial players in China will be instructed or encouraged I should say to go into the markets and the pension funds and all of that will do the same sort of thing.
I haven't lost long-term confidence in the China markets at all. We were all of us saying when the thing was rocketing up that 100% in 6 months was, to quote Shakespeare, like a "rash fierce blaze of riot [that] cannot last...He tires betimes that spurs too fast"; straight out of Richard II—that's where we were.
So it's not a surprise and it won't bring the whole world down—that's the thing. I think it's very important that China at the moment definitely doesn't look like it's going to bring the world down and I think you'll find that even US asset allocators will be starting to say to their really big clients, 'You know what, this could be a long-term entry point. You want the stock to be available at a sensible price instead of chasing after a rocket ship’s tail pipe and we should be thinking of allocating money this way or if the dip goes much lower than that 35% drop we just had.'"
Listen to this full audio interview with esteemed market technician Robin Griffiths where he also gives his outlook on US markets, gold, and commodities by going to our Newshour page here or on iTunes here (Robin's portion starts at 18:30). Subscribe to our weekly premium podcast by clicking here.
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