Surviving the Chinese and euro storms – by John Redwood (Financial Times – August 21, 2015)

I’m staying well away from commodities

We have just seen a perfect storm. Markets gave a strong warning to the bulls and underlined why many people chose balanced or cautious funds to limit sudden swings into loss on their investments. In recent weeks some markets have issued a timely reminder of why investment specialists usually recommend a spread of assets to limit your risks.

This summer has brought big falls in some markets. The Greek stock market closed for a month and then reopened much lower. Greek uncertainties took some of the shine off the better performance from euro area shares. The Brazilian market, the largest exchange and economy in Latin America, is down by more than 40 per cent over the past year.

The authorities there are trapped between recession and inflation, with crisis levels of interest rates. The domestic Chinese share market suddenly fell nearly 30 per cent after a phenomenal upwards run. Commodity markets continued their downwards moves after the oil rally of the spring.

The inability to buy and sell shares in Greece at all made investors realise how important continuous liquidity in markets is, and how much we rely on the ability to get out if we change our minds. As we witnessed Greek banks close and Greek companies unable to settle overseas bills, it reminded us of the collapse of the Cyprus banks where large depositors suffered losses.

The eurozone can remain a dangerous place for investors. This was reinforced by the inability to trade numerous Chinese domestic stocks for a few days when the authorities and the Chinese companies sought to stop a collapse in prices by suspending trading in a large number of shares.

If you cannot sell shares when you wish, they are usually valued at lower levels to reflect that danger. The Chinese now wish to stabilise their domestic market or even to drive it higher, but once the restrictions on Chinese selling are eased there could be more heading for the exit.

The notional FT fund is up around 10 per cent over the past 12 months, despite losing a bit in the early weeks of the third quarter like most other managed funds. I had seen the emerging market and Latin American problems coming, and sold the emerging markets ETF holding before the falls of July.

I have no commodity based investments and remain cautious about their prospects. The fund, which has done well from its reasonable exposure to China, lost some of those gains when the markets reversed.

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