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Evergrande
3333,
a Chinese real estate developer, likely hasn’t been top of mind when you consider whether or not to buy or sell stocks. But lately analysts are on edge about the company’s $300 billion in debt, which contributed to a global market selloff on Monday.
On Monday, the Dow Jones Industrial Average
DJIA,
shed 614 points (1.78%), while the S&P 500
SPX,
lost 75 points (1.70%). On the opposite side of the globe in China, the Hang Seng
HSI,
dropped by more than 3%. Stocks were largely treading water in positive territory on Tuesday morning.
“‘If you don’t like how your portfolio is behaving you can use this as a de facto stress test’”
Unlike many financial institutions including Chase
JPM,
BNY Mellon
BK,
and Goldman Sachs
GS,
which the U.S. government bailed out after being deemed “too big to fail” during the Global Financial Crisis, the Chinese government hasn’t signaled they’d be willing to help cover Evergrande’s tab.
That may not matter if S&P Global Ratings’ prediction — that Evergrande’s expected default will neither lead to a “tidal wave” of defaults nor mere “ripples from a pebble in a pond” but something between the two — is correct.
But in the meantime, the uncertainty surrounding the exact severity of the situation continues to rattle markets and individual investment portfolios — which begs the question among retail investors, especially those new to dabbling in financial markets: Is there anything I should be doing differently to dampen from the blow?
What should you do differently after this week?
For the most part, you shouldn’t pick apart your entire investment strategy over one ugly trading day or week, said Scott Bishop, a financial advisor at Avidian Wealth Solutions in Houston.
Monday and the days leading up to it are the “types of days where we’re being tested to see if our portfolio allocation is appropriate for our risk tolerance,” he said.
Bishop compared it to a medical stress test where a patient exercises usually at a medical facility to increase their heart rate and in doing so detect potential heart or blood-flow problems.
“‘Oftentimes, the best strategy is not to be taking action at times like this’”
Similarly, “if you don’t like how your portfolio is behaving you can use this as a de facto stress test and say ‘What do I need to do to redeploy possibly some parts of my portfolio so it’s not as sensitive to these market moves?’’
But Bishop is advising clients “not to necessarily make trades” if they identify problem spots in their portfolios during the course of this current selloff because they may be overacting in the heat of it.
Brad Lineberger, president and founder of Seaside Wealth Management based in Carlsbad, Calif., is going one step further. He is advising clients not to even log into their investment accounts.
“The more we look at our investments, the more tempted we are to take action and want to try to do something about it when oftentimes the best strategy is not to be taking action at times like this,” he said.
That said, “if days like today have people so uncomfortable that they can’t help but do something that potentially could blow up their long-term planning,” they may want to “rethink their asset allocation for the long-term.”
Should you reconsider investing in Chinese-based companies?
“Historically the emerging markets, specifically China have been a very volatile asset class,” Lineberger said. That’s why he has always encouraged investors to allocate most of their portfolios in U.S.-based stocks or bonds.
Bishop sees Evergrande as yet another reason to steer away from investing in Chinese companies.
For starters, he does not trust the Chinese government-published economic data such as the country’s gross domestic product growth. “We have no idea if those numbers are true,” said Bishop.
“‘Historically the emerging markets, specifically China have been a very volatile asset class.’”
If the majority of your portfolio is exposed to China “you’re putting a lot of faith in the Chinese Communist Party and that they’re going to be a good actor in the world community.”
As MarketWatch columnist Therese Poletti wrote in July: “This is your final warning — Chinese stocks listed in the U.S. are dangerous to hold.”
“While passive investors face risks, the real hurt could be reserved for retail investors who bet big on momentum stocks like Pinduoduo, NIO Inc.
NIO,
or a whole host of other Chinese companies. Some investors may already be starting to get nervous,” she wrote.
What’s more, several bearish investors have noted that plummeting iron ore prices are portentous signs of slowing growth in China, which could have implications for the growth of the global economy.
The two economies are linked. For example, a slowdown in China would increase the likelihood of a recession in the U.S. next year, according to Jay Hatfield, chief executive officer and founder of Infrastructure Capital Advisors in New York.
“It’s okay to have exposure to China,” Bishop said, “but I wouldn’t put my retirement viability in China.”
