As China and the businesses that operate within it adjust to a slower pace of economic growth, the Year of the Monkey will be a crucial one; those with strong products and strong brands stand to do well. Others are likely to fall by the wayside. Legendary investor Warren Buffett says that when the tide goes out, you can see who’s been swimming naked. In China right now, there will be more than a few c-suites where managers are wishing they had a towel handy. This is a market that may be delivering sluggish growth in comparison to the rates we’ve grown accustomed to in China – but it is still growing.
Now, however, that slower growth, coupled with volatility on the stock markets, means there is pressure on consumer confidence and spending, and that means only the strongest brands will now benefit from China’s growth. This year, we believe, will see a shake-out; for the businesses that have invested in their brand during times of fast growth, and which have built a relationship with consumers, this could well be beneficial, as competitors that have cluttered their category struggle and disappear. For those who have not yet earned a place in consumers’ hearts and minds, the coming year will be an enormous challenge.
And no I don’t mean Greece and the Euro…
The Shanghai Composite Index has been seeing a lot of Red. Normally in China red is good…But not this type of red.
The Shanghai Composite has lost some 30% of its value since its June 12 peak.
Over the past two weeks of trading more than $3Trillion has been wiped off the value of Chinese companies. Everything in China is big but if you put it into context that is more than the Spanish, Russian, Italian, Swedish and Dutch stock markets combined according to The Financial Times.
Perhaps the most significant element to this is that the policy makes in Beijing have been trying to stop the decline with a number of financial measures, not least buying shares it appears. But, unusually the strong arm of Beijing is having little impact with both direct and indirect intervention.
Bank of America Merill Lynch forecasts the composite to close at the end of December at around 3,600 from the June high of 5,166.
This might not be far off the mark for if this goes on for much longer more investors will face margin calls which will require more liquidation of their holdings…
This is the first time many retail investors in China have felt the pain of the sea of red. Investing in the stock market has been a one-way bet. Now they are experiencing the downside in investing in Companies they really don’t understand and for the first time they don’t like what they see.
Don’t underestimate the Chinese Government determination to bring order back to the market. Thy have thrown a lot at this problem but they still have more left.
Red really is the new black.