This week, for the first time since mid-2013 the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) fell under the psychologically important 5,000 point level.
Of course, the last time the index passed through 5,000 was during a multi-year bull market which saw the index rally all the way from about 4,000 to nearly 6,000!!
The speed on the re-tracement from just under 6,000 as recently as April 2015 to Monday's close of 5,030 has certainly caught many investors off guard.
While there have been a number of contributing factors, a major cause of the declines has been negative investor sentiment toward China. Investor concern hinges on just what the future holds for our most important trading partner which is currently experiencing wild swings in its own share market and whose growth prospects appear to be increasingly subdued.
According to Bloomberg, the People's Bank of China injected US$23.4 billion into its banking sector last week. Depending on your perspective that can either be considered a positive – with the Chinese Government acting pro-actively to boost its economy – or it can be considered a warning sign that it was indeed necessary to intervene.
The next piece of news was pretty much a negative from all perspectives – a revised growth rate for GDP in 2014 was released which saw the figure downgraded from 7.4% to 7.3%. While a 0.1% rate may not be much and of course 7.3% growth is still incredibly strong compared with most other economies, it is the direction which is concerning for investors.
Any slowdown is likely to mean less demand for Australian exports and amongst the major losers are leading iron ore producers Fortescue Metals Group Limited (ASX: FMG), BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO). Although these three stocks have already lost around 50%, 30% and 20% in the past year, investors who are tempted to buy at these levels or shareholders who continue to hold need to consider just how much of a China slowdown is already factored into the share price compared with possible further downside risks.
