Janet Yellen has once again spooked the emerging markets with talk of ending the federal stimulus program. Yesterday, she announced that the Fed would reduce its bond buying program, shaving off $10 billion to take its monthly purchases down to $55 billion, with an eye towards completely ending the program by year's end.
The real damage was done by Yellen's hints that interest rates are likely to start ticking higher sometime in the summer of 2015, fueling fears of fund outflows from developing markets. The signal was that interest rates would run at 1 percent by the end of next year and 2.25 percent by 2016.
Those concerns were exacerbated by China's announcement that it is speeding up construction projects and taking other steps to boost the county's economy, a clear sign that the Chinese government is concerned that it might miss its growth target this year. Key officials have been hinting that growth of 7.2 percent in 2014 will be considered close enough to the government's target of 7.5 percent.
It's widely speculated that, in addition to accelerating "shovel-ready" projects, the government will also begin loosening monetary policy over the next few months. While there don't seem to be any plans for direct injections of money, it’s likely that bank reserve requirements will be cut, particularly as the government is eager to counteract the effect of Zhejiang Xingrun Real Estate Co's collapse. It will also allow property developers to raise funds by selling shares for the first time in almost three years.
A large, privately held developer, Xingrun Real Estate recently defaulted on RMB3.5 billion in debt amid allegations of mismanagement. The first onshore Chinese bond issuer also defaulted earlier in the month, on the heels of the bailout of China Credit Trust Co.
Thanks to all of this bad news, the Hang Seng China Enterprises Index, commonly called the H-sh! are market, which measures the performance of Hong Kong-listed Chinese companies, hit a one-year low in trading last night. It also blew through the 20 percent decline level, leaving little doubt that a Chinese bear market is underway. The H-share is now the worst performing regional market so far this year.
Don’t Cut and Run
But none of this means that it is time to cut and run from China.
It's impossible to accurately and consistently time market movements, so bailing out now would only lock in losses. The people who make the real money in the markets are those who keep buying good companies on the way down, to amplify their gains on the way back up. If you kept investing in S&P 500 companies on the way down in 2008, you've probably done even better than the market's nearly 175 percent gain since the bottom occurred.
At this point, no one is predicting a major recession in China this year, with even Fitch Ratings forecasting that the country's struggling property market will pick up in the coming months. It also seems confident that the government has a handle on the country's debt levels and, so far, we haven't seen a massive outflow of capital from the country. Foreign businesses are continuing to invest in China which, for better or worse, is now one of the world's largest markets.
So rather than being rattled by the bear market news, we should take advantage of the opportunity to pick up shares on the cheap.
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