28 October 2016
China's stock market rout on the first trading day of 2016 has spooked investors around the world. Photo: Reuters
China's stock market rout on the first trading day of 2016 has spooked investors around the world. Photo: Reuters

Lessons from a Black Monday

China’s securities regulator has put in place a “circuit breaker” rule for A-shares in a bid to curb excessive price swings and prevent market turmoil. 

The new safeguards were put to the test on the very first trading day of 2016. After the CSI 300 index plunged 5 percent on Jan. 4, trading was suspended for 15 minutes. When trading resumed and stocks continued to fall and took the index losses to 7 percent, trading was halted for the day.

The crash in the mainland markets caused jitters in Hong Kong, with the Hang Seng index tumbling 587 points, or 2.7 percent, that day.

The shockwaves also reverberated elsewhere in the region, as well as in Europe and the US. On Wall Street, the S&P 500 index slid 1.5 percent while benchmarks in Europe suffered losses in the range of 2 to 4 percent.

The dismal start to 2016 has unnerved investors, who are worrying that the Black Monday could presage bad things for the markets for the full year.

We have analyzed the “January effect” previously, which showed that there’s large chance that a rise in Hang Seng Index in January will lead to a full year increase, and vice versa.

Based on my trading experience, such effect however only has some reference value. We should bear in mind that professional investors make their decisions on full-year fundamental projections, rather than short-term market momentum.

The rout in the A-share market on Monday was triggered by some unusual circumstances. Investors don’t need to overanalyze it. The past is history, while the future is unpredictable. Every year is a new start.

China is suffering some pain due to its efforts to reorient the economy. Tensions in the Middle East are affecting oil prices, while North Korea’s claims of carrying out a hydrogen bomb test have also increased the geopolitical risks.

On the monetary policy front, the US has started the process of normalizing its interest rates, while Europe, Japan and China are continuing loose monetary policies to boost their economies. 

Overall, the global economic picture looks murky. 

In the past seven years, liquidity was the major engine that determined asset price changes. It is the same situation now.

I would advise investors to keep an eye on capital flows and make their moves accordingly.

This article appeared in the Hong Kong Economic Journal on Jan. 7.

Translation by Myssie You

[Chinese version 中文版]

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head of private banking and trust services at Hang Seng Bank

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