China is primarily the catalyst in this market selloff, said Rob Lovelace, portfolio manager and president of Capital Research and Management Company.
China was for a while “the only piston firing in a global economic engine,” and the country was growing fast until three years ago, he added.
“It was the only major economy to power right through the financial crisis and keep on moving forward,” he said. “Then the US economy started to pick up and, for a time, there were two major economies contributing to global growth. The hope was that Europe and Japan would follow. We haven’t seen solid evidence of that yet. So when China started to slow down, you can see why investors reacted very negatively.”
He said that it was the devaluing yuan, instead of the crashing A-share market, that unsettled the market as the yuan depreciation made investors wonder if economic growth was actually worse than expected.
The stock rout throughout the globe appeared only to be a market correction instead of a financial crisis, he said, as he has not seen any signs of stress in the global banking system.
Given its tightly controlled and closed financial system, Lovelace believes China was able to prevent a full-blown financial crisis from developing and spilling over.
But he admits it is difficult to predict what will happen because China’s government still controls many of the banks, monetary and fiscal policy and many of the country’s larger companies. It makes it difficult to use the normal tools to analyse a classic, open-market developed economy.
“We’ve never seen such a large, controlled economy go through a powerful cycle like this,” said Lovelace, “so it is tough to say how much of it will spill over and how much of it won’t.”
He said that China needs a correction to clean up credit excesses and many of the excesses are getting cleaned up.
Lovelace compared now with 2009 when the market started bottoming out but people suspect that QE will get the US out of trouble.
“No one thought that US stocks would touch new highs within a few years, but that’s how it unfolded,” said Lovelace. “These situations when we are most fearful are generally the moments of greatest opportunity.”
The correction is the growing pain of an economy that is transitioning from a closed, investment-led economy to a more open, consumer-led economy, said Timothy Armour, portfolio manager and chairman of Capital Group.
“We should be prepared for this transition to be rocky, but also use the turbulence to invest in strong companies along the way,” said Armour.
Amid the selloff, Amour said the Chinese Internet companies are the one obvious area of opportunity, as their valuations look more attractive on most parameters relative to other large Internet companies, as the correction has taken them to levels where they may present opportunities.