- Chinese and Hong Kong stocks drop overnight
- UK banks, miners and energy shares sold off
- Uncertainty replaces optimism over re-opening
The UK market struggled at the start of the week as shares in businesses with big exposure to China sold off after large anti-government demonstrations in several major cities caused investor jitters.
Banking groups HSBC (HSBA) and Standard Chartered (STAN) were prominent among the losers, along with mining firms Anglo American (AAL) and Rio Tinto (RIO).
Shares in major energy producers BP (BP.) and Shell (SHEL) were also weak over fears the Chinese economy could slow further due to the country’s zero-Covid strategy.
WHY ARE INVESTORS WORRIED?
Public demonstrations are extremely rare in China, so the sight of tens of thousands of people on the streets protesting over Covid restrictions has rocked local stock markets which were just starting to look forward to an easing of government policy.
Video footage of protests by workers at Foxconn Technology (2354:TPE), a major supplier to US consumer goods giant Apple (AAPL:NASDAQ), helped spark unrest in Beijing, Shanghai and Wuhan reflecting public frustration at three years of continual lockdowns and testing.
What is worrying foreign investors is on the one hand protests are likely to be met with even tougher restrictions, as president Xi Jinping cannot afford to be seen to back down, and on the other they are likely to exacerbate the slowing of the economy, which is bad for commodities such as oil and iron ore.
WHAT DO THE EXPERTS SAY?
‘China is a rapacious consumer of global commodities and signs economic activity is being disrupted by the mounting dissent in the country will be seen as negative for demand’, says AJ Bell investment director Russ Mould.
‘The unrest is already affecting business in China including Apple which has seen violent clashes at one of its facilities in Zhengzhou’, adds Mould.
‘In this context the selling in mining, oil and gas stocks makes a lot of sense and it’s notable that other European indices aren’t as impacted as much as the resource-heavy FTSE 100 this morning.’
As Bloomberg’ Matthew Brooker points out, it is no coincidence that frustration bubbled over just as China had begun to ease back on some of its most draconian restrictions.
Earlier this month the government published a list of vague guidelines designed to reduce the impact of Covid restrictions, but they failed to meet the public’s expectations.
‘This illustrates the dilemma for an authoritarian system that decides to loosen its grip’, says Brooker. ‘Like a crack opening in a dam, the suppressed pressure builds quickly. The result is a perilous situation, to which the government will need to respond quickly.’
Given the uncertainty over the short-term response, the decision by investors to take some of their chips off the table makes a good deal of sense.
Disclaimer: Financial services company AJ Bell referenced in this article owns Shares magazine. The author (Ian Conway) of this article owns shares in AJ Bell.
