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Total Capitulation as Shanghai Sells off 8.5%

Total Capitulation as Shanghai Sells off 8.5%

Despite a government effort to calm the market, Chinese stocks opened the week with the biggest 1 day drop since 2007. Though the markets in China had recovered 15% from their slump earlier in the month of July, those gains are now all being wiped out.

While most of the plunge happened in the last hour of trading, Analysts say that the fall was a result of brokerages restricting credit used to finance stock purchases or margin trading; that said, it’s important to note that economic sluggishness is also being blamed for the precipitous fall.

Last month about $3.2 trillion in market capitalization was wiped away. Since June, Chinese shares are down a dramatic 30%. The story before June was much different however, as the Chinese stock market had risen a whopping 150%. All told, Chinese stock prices are still 75 per cent higher than they were last year.

Some of the support measures announced by Chinese officials, like forbidding major shareholders from selling, and ordering some state-owned companies to buy more shares did not seem to work. The IMF warned Chinese officials that they should let the market forces play out and not intervene — however, today’s all green screen (in China, green symbolizes a fall in the market while red symbolizes a rise in the market!) gives officials further motivation to intervene.

China is America’s largest trading partner and became the world’s largest economy at the end of 2014. When China sneezes, it’s not just the United States who catches a cold — each continent is affected.

The Bottom Line

As dividend investors, we certainly don’t believe in fear-mongering. As such, dividend investors should understand that from 2000-2015, the Chinese stock markets have had a very low correlation with the S&P 500. Trends have tended to move in the same direction—however, not as sharply. Conversely, American markets in comparison to European markets have shown a very strong correlation. So, statistically speaking, a fall in the Chinese stock market might not have a major impact on US Equities. However, as they say, “statistics are like short-shorts, they’re revealing, but still leave a lot to the imagination". If you are thinking about adding companies with little or no foreign market exposure to your portfolio as a defense strategy, then here is a list of Companies, REITS and a recently launched WisdomTree ETF that focus on companies that have minimal to no foreign exposure and have most of their revenues denominated in USD.