'Naïve extrapolation' of China's super normal growth has resulted in bubbles

Dramatic falls in Chinese equity markets have caught the headlines again early in 2016, as the bubble in Chinese domestic equities continues to deflate.

The usual suspects in terms of equity market bubbles seem to have been present (margin trading, unscrupulous promotion of junk equity to retail investors etc); although the slowing of Chinese economic growth (rather than domestic stock market returns) are of more interest and relevance to global equity investors. In our view, the naïve extrapolation of super normal economic growth rates in China in recent years has created several other bubbles in equity sectors in developed markets, which are still deflating and create both risk and return opportunities for investors. It has been app...