Investors should stick with China despite turbulence on the CSI300, Shenzhen composite index and Shanghai composite index

 
Mark Dampier
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CHINA-WEATHER
The bigger question of late is "should investors avoid emerging markets?" (Source: Getty)

Markets have started 2016 firmly in the red, suffering knock on effects of a seven per cent fall in the Chinese stock market.

But this early capitulation has more to do with bans of share sales and short selling than the weaker manufacturing data.

Perhaps the bigger question of late is "should investors avoid emerging markets?". This isn’t surprising after a reasonable period of underperformance and given plenty comment on problems in China.

Read more: China is key to securing London's future

However, investor portfolios should have a footprint in most areas of the global stock market. By the time investors have begun to avoid an underperforming area it is often too late – in fact it can be a great time to start gradually buying again.

So don’t give up on Asian and emerging markets, and remember it is more than a one year story. In most cases they still have strong demographics and a rising middle class. These are two excellent fundamentals for a better economy.

Another general view is that markets have done poorly in 2015. A look beyond the headline FTSE 100 Index reveals that isn’t actually the case. Specific areas have certainly been a disaster – mining and oils are a big standout. The FTSE 100 has its biggest sector weighting in oils and mining, so it is not surprising to see the index down around five per cent in 2015. And dividends soften this loss by over half.

The FTSE 250 Index, which is more representative of the UK economy, is up over eight per cent (and closer to 12 per cent when you include dividends). This is not so bad against a zero inflation background.

So what of 2016? Investors remain nervous and there are plenty of reasons for worry: historically high valuations in the US market, well-documented problems in China and geopolitical events in the Middle East to name but three.

Read more: Low oil prices, China slowdown to blame for "notable downswing" in AIM market

Nevertheless, these are well-known and therefore already largely factored into share prices to an extent. What usually derails a stock market is an event nobody has predicted – a "black swan", to borrow a phrase from Nassim Taleb.

One can always find reasons not to invest – yet this is why so many investors have missed out on the last few years of this bull market. Over the longer term, I always think it pays to be more optimistic.

Long term investors need to ignore much of this short term noise and make sure they have enough cash for everyday needs and ride out the turbulence. Markets falls almost always produce buying opportunities and patient investors should reap long term rewards.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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