Concerns about the state of the Chinese economy have led to a global market sell-off. While Chinese equities have steadily fallen since earlier this summer – pausing only briefly when the Beijing government vowed to provide financial support to the markets – the past week’s decline in developed markets have made investors significantly more anxious.

But problems in China logically impact its trading partners in Europe, Asia and the Americas. When Chinese domestic economic growth slows, its demand for raw material imports falls. Weaker domestic Chinese demand also hurts foreign exporters.

The big question is how reliable the economic numbers coming from Beijing are. The economy is clearly not growing at the stated target rate of 7% per year. But the impact on the global economy of a 5-6% growth rate versus a 2-3% rate should not be understated.

China has responded to the weaker growth figures and falling equity markets by devaluing the yuan and injecting capital into the financial system. It remains to be seen whether these actions will be sufficient to restore in investors’ confidence.

At Springwater, we have been cautious about China for some time, due to its growing real estate “bubble” and the unreliability of its economic numbers. Our clients hold modest exposures to broadly diversified baskets of emerging markets stocks, rather than single-country positions.

The US markets have not been immune to the problems in China (and to a lesser extent Greece). American multi-national corporations are major players in China. There are also valid concerns that a prolonged downturn in the Chinese economy will spread to other emerging and developed countries (not unlike the “contagion” fears that plagued Europe in 2011 when Geeece first faltered).

Despite this week’s correction in US stock prices, many observers believe they are still fairly high, relative to historical measures. For that reason, there are few analysts calling this a buying opportunity – yet.

In this environment, the US Federal Reserve – which was planning to start raising interest rates this fall – may well choose to delay its planned rate hikes. While the unemployment rate is near the Fed’s target and inflation remains at historically low levels, the argument for an upward move in rates is no longer as compelling.

With so much uncertainty, what is a prudent investor to do?

Our advice in uncertain times – like the years 2000-02, 2008-09, and today – is to remain committed to the principles that characterize successful long-term investing: an asset allocation that is appropriate to one’s investment horizon and risk tolerance, diversification across and within asset classes, cost control, and tax-efficient asset location.

At times like these, it may seem a cliche to say that “the price of long-term growth is short-term bumps in then road”. However, it is important to recognize that most investors have an investment horizon that can be measured in decades.

We leave you with the words of Warren Buffett:

“Be fearful when others are greedy, and be greedy when others are fearful”.

We take our fiduciary role as your financial advisor very seriously, and remain committed to helping you successfully navigate the investing seas, calm or stormy.

Please let us know if you have any questions or comments.