Baker Tilly comments on stock market volatility following China Black Monday

Commenting on the volatility following the falls on the Chinese stock market, Rob Donaldson, Head of M&A and Private Equity at Baker Tilly Corporate Finance said:

'The significant corrections to the Chinese stock market that we have seen in recent days and weeks should not come as a big surprise to market watchers. Over the last few years, tens of millions of individual investors in China - who vastly outweigh institutional investors (80/20 versus the other way around in the developed markets) - have been encouraged by the State apparatus to plough their money into shares. This has pushed prices up far beyond their fundamental value and what we are now seeing is a painful, but perhaps necessary, return of common sense.

What is perhaps more surprising is the degree of knock-on effects to share prices on the FTSE and across European markets, but we should perhaps be wary of undue panic. Fundamentally, the Chinese economy was always going to slow as the middle kingdom neared middle income status. That has, time and again, been the experience of the so called tiger economies that came before it.

In terms of impact, it seems likely that the Chinese economy will be scarred by the experience and the slowdown in that economy will continue and that will impact economies elsewhere. Businesses and economies focused on supporting the Chinese mega cycle will suffer. However another view is that it was time for the rest of the world to take up the slack. China did its bit to boost world demand in the Great Recession of 2008 onwards. Now with the US, the UK and Europe (recently) struggling into recovery mode the onus is on those economies to lift the world through this difficult period.

As capital flight continues and hot money heads for the exit, a possible side effect is that investors will now be more likely than ever to look to make their money work for them elsewhere – including in the UK. Chinese companies and investment firms who have entered the private equity market are increasingly looking to the UK and we have recently seen Hony Capital’s investment in Pizza Express, Wanda’s investment in Sunseeker International and Baring Asia investing in Cath Kidston to name but a few. This trend could accelerate once the rush for safe havens such as Treasuries, Bonds and Gilts calms down.

This correction may also have a silver lining in that there will be reduced inflation pressures for UK PLCs, and will potentially influence the Bank of England when it comes to the timing of an interest rate rise. In the medium term, whilst there will be volatility, it is likely to keep the Western recovery on track as central bankers keep their foot to the floor, feeling they can safely ignore inflation concerns - at least for now.

We think interest rate rises have just been pushed back into 2016.