Shanghai and Shenzhen bourses tumble

Asset managers look at bigger picture after massive sell off on ChinaÆs main stock exchanges.
Chief investment officers urge investors to stay calm after yesterdayÆs ferocious bout of profit taking on the Shanghai and Shenzhen stock exchanges.

The Shanghai Composite index comprising A and B shares tumbled 8.84% on the day while the Shenzhen Component Index plunged even further to lose 9.29%. Total trading volume across both bourses hit nearly $25 billion û more than 108% up on the previous day.

Daniel Zeng, chief investment officer at First State Cinda Fund Management in Shenzhen, says the sharp decline of stocks came from the residual impact of mutual fund profit-taking before ChinaÆs new year holiday and should not be read as significant for the long-term direction of the market.

ôUp to now redemptions have not been a key factor in the market,ö he adds. ôBut the final trading day of last year traditionally sees a big redemption in mutual funds and today was the last day funds could meet those redemptions. Others may follow and take profits but the market was expensive. This emphasises the need for fund mangers to pick the right stocks.ö

Nigel Richardson, CIO at Axa Investment Management in Hong Kong, which is planning a funds joint venture with Shanghai Pudong Development Bank, says the China market weightings in the companyÆs balanced funds had already been reduced. Profit taking is not as significant as yesterdayÆs activity looks.

ôWe do not feel it is necessarily a profit-taking issue,ö he explains. ôIt is a valuation issue and with some companies showing forward P/E at 70x people will be wary of stocks for a while. It also shows that the Chinese authorities are serious about cooling down the rate of growth and their tightening of policy justifies this correction on top of last yearÆs sharp run.ö

Zeng predicts a near-term up-tick in market volatility and that valuations may take some time to become reasonable but, he adds: ôInvestors should forget about market movements and focus on market fundamentals such as profit growth which will continue to be strong.ö

Richardson warns against trading against short-term sentiments in a market deemed a long-term story by professional managers. ôWe may see a period of consolidation but the market will come back again. Even during the last global recession the economy grew at 8% while analysts have consistently underestimated growth expectations.ö

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