James Spence, managing partner of Cerno Capital, comments on how investors should respond to moves in the Chinese economy
In terms of long-term investment in China, investors should not make the mistake of assuming there is some cohesive plan in Beijing - there is not. The question is whether to take official comments at face value. The People's Bank of China (PBOC) has been somewhat trapped by its own logic. By referencing offshore rates they have made three weaker fixes in the world before changing their minds on the third day.
In terms of risks to further RMB currency weakness, reduced purchasing power from China may remove an element of global corporate profit growth. This in turn crimps returns from the only remaining prospective asset class: equities.
Investors should look to increase currency hedges out of Asian domiciled investments, and increase hedges back to GBP and USD. They should also ensure their portfolios are not solely exposed to growth equities, but diversified by both geography and style.