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August 2015 - China, gold & emerging markets

It’s summer and markets usually take a break along with the rest of us. This year this certainly hasn't been the case in China, where speculation akin to the tech bubble in 2000 took the Shanghai indices to unsustainable levels. We are now in the fall-out phase with the government using dubious measures in its desperation to prop up the market. It has a lot of fire power but there are still many speculators nursing losses who want to get out when they can. So, although the market has fallen a long way and in the long term China will become a much bigger player from an international equity perspective, now is not the time to go back in. The analogy of trying to catch a falling knife springs to mind.

There has been a knock on effect in emerging markets generally as well as some Asia Pacific bourses. A strong dollar and weak commodity prices haven’t helped either. Similarly it will be better to keep your powder dry and wait for more stable economic conditions before allocating to these sectors too.

The other market that has been out for the count is gold. Demand for the physical metal is very strong, witness the doubling of sales of Golden Eagle coins by the US mint in July alone. The paper or futures market is a different story. Here there have been some very large sellers of gold futures contracts in the normally quiet night-time markets (the market is open 24 hours), which have bludgeoned the price of gold down. Whoever is doing the selling is quite obviously not price sensitive and we suspect the hand of governments and central banks although their motives are unclear. At some stage the law of supply and demand will return and with it a change in the fortunes of the barbarous relic.

In the meantime it would be worth doing your homework on funds that will benefit from market rallies in due course. They include Invesco Perpetual Hong Kong & China, First State Greater China Growth, First State Indian Subcontinent, Schroder Asian Alpha Plus and Asian Income, Charlemagne Emerging Markets Dividend, Lazard Emerging Markets, and BlackRock Gold & General.

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Clive Hale, Director – August 2015

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