China is clearly causing markets to tumble and tremble, and here I am not only referring to Chinese equity markets but risky assets in general; namely global equities, lower rated bonds and those asset classes which are exposed to the global economic recovery.

Much has been said about the asset bubble in Chinese equity markets and the subsequent market crash in China and currency devaluation by the People’s Bank of China (PBOC) but what is more important is the shorter-to-medium term effects the recent moves are having on the shaping of the global economic outlook and forecasts on key economic data such as inflation, growth and yields.

Markets are said to be dictated by investor sentiment, and sentiment right now is evidently on a downward trajectory, as are closely watched economic data indicators such as Leading Economic Indicators across the major global economies. Furthermore if we are faced with further sharp downward moves, the herd instinct could kick in at which stage investors turn on the panic-mode button and trigger additional exacerbated moves to the downside.

What would be even more worrying is a scenario whereby policymakers (politicians, central bankers) find it difficult to contain the negativity as they have already gone a long way over the past 7 years (ultra-loose monetary policy) in keeping markets supported.

Having said that, I am aware that some EM economies have sufficient FX reserves (in the tank) to withstand this bloodbath, for the time being at least. What would be key for market sentiment to bottom and reverse its current trajectory will be the conviction from investors that the leading advanced economies can endure a protracted period of lower growth.

Going forward, i would be looking for concrete action from China, one of the world’s key economic powerhouses, whose economy spearheaded the recovery post 2008 crisis and is on the verge, well at least that’s what the market seems to be indicating, of a soft landing.

So from this point forth, we would expect key announcements from the PBOC to reinstil market confidence and come clean on what prompted the devaluation and what their strategy is expected to be in the short term. Furthermore, the PBOC would also need to quell any possible deflationary fears and pressures recent volatility could cause, which would undoubtedly increase the likelihood of a hard landing in China.

Commodity prices and the timing of a first Fed rate hike in 2015 are also likely to be key to investment sentiment heading in the final stretch (Q415), themes which should be given their due importance over the coming weeks. What is certain is that the large moves witnessed in markets over recent weeks have created pockets of value and possible attractive entry points.

There are also some strategies which could well take advantage of such volatile moves. Take Balanced Funds or Asset Allocation strategies, for example, which benefit from inflows in the form of annuities, would tend to have the necessary ammunition (cash at hand from Investment Managers) to be able to pick up stock at lower levels and average down on those names which have taken an un-warranted beating and which, in the longer term could be at the forefront of an upward reversal in market trends.

This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.