Chinese stocks down by a whopping 8.5 percent. Know why

Traders and investors are likely to remain net sellers in at least this expiry week as the global sell-off gains momentum across all major markets as China's sudden devaluation two weeks ago continues to roil stocks. Chinese stocks are down a whopping 8.5 percent.

Stocks in Hong Kong dropped 5.2 percent; those in Taiwan plunged 7.5 percent and in India the Nifty is down 5.1 percent.

How did all this happen?

GDP expansion in slowed in China, the world's second largest economy, to 6.6 percent in July. Slowing growth came against the background of an already weak market that had corrected sharply. A panicked Chinese government restored to devaluing the Yuan in a bid to boost growth via higher exports. At the same time it provided lots of liquidity support to brokerages in a bid to stem the tide of falling stock prices. Nothing worked.

Meanwhile, the panic seeped into other Asian currencies as governments worked overtime to protect their own industries from cheaper Chinese imports. The fear spread to equities, leading to a sharp sell-off in emerging markets and funds investing in such growth areas.

The US Fed interpreted the global slowdown in a way that meant its pending rate increases would be delayed. The markets read such a move as a negative interpretation for markets and a fresh sell-off ensued. As a consequence, the US markets are down 5.8 percent in five days with the Dow falling nearly 10 percent from its most recent peak.

Stocks in the European Union suffered the same fate.

So, what does the future hold for equities?

Today, nearly 800 Chinese stocks are trading at a 10 percent down limit and the market has corrected 38 percent from its most recent peak, wiping out $4 Trillion in market value. China is in for more punishment: Some sectors continue to be in a bubble. Those lofty valuations will be punctured.

The Nifty, meanwhile, has dropped 14 percent from its most recent peak hit in early March. Stocks are likely to get punished further as collective profit and sales growth during the first quarter earnings was hardly a number to be happy about. The best way to catch this falling knife would be to have concentrated systematic investment plans in select front line stocks from export oriented sectors.

Investing in such periods of intense crises pays off fantastically in the immediate aftermath of the turmoil

Surely, this dust will settle down and with it will come a new breed of stocks that will lead the market a lot higher than the previous levels. Use this time to ferret out those stocks.

AND Stay away from mid caps and small caps.

Image credit: Indiatimes