Yoshikami: What's Wrong with China Equities?
China reported gross domestic product growth below many analysts expectations and the markets shuttered.
What's happening with this once-strong growth engine for the global economy? With headlines blaring that wage increases will make China less of a cheap manufacturing destination, has China lost its competitive advantage? Will soaring Chinese real estate continue to hamper the efforts of China's central bank to stimulate the economy?
(Read More: Has China's Economy Hit a 'Dead End'?)
For sure, there are many uncertainties about China. It's just not simply a place where one can bank on investment gains despite talking heads and analysts promoting emerging markets as a guaranteed win. But you knew that right? It's never really as simple as it sounds.
What's happening with China equities right now is it is a momentum play where the momentum is moving against investing in China. The fundamentals are still there but those must be matched up against actual valuations and expectations. And in a momentum play, if expectations are not met and lofty hopes are dashed by more sobering business results, it really doesn't matter how good the numbers are; that asset is going down.
(Read More: By 2015, Producing in China Will Be as Costly as US)
One only needs to look at the trials for Apple investors for a comparative illustration. It's hard to dispute that Apple is a cash machine with a massive war chest and an enviable competitive position. Are there any smart phone makers in the world that wouldn't at a moments notice trade places with Apple? I doubt it very seriously.
Still, Apple stock is down close to 45 percent after reaching a high of $700 because investors can't find any news to push momentum and sentiment higher. It's really not about fundamentals right now with Apple; it's all momentum. One only needs to look at the price movements of Netflix over the last couple years to see how momentum stocks can bounce and give investors both heartache and euphoria. Check it out; the fluctuation is incredible on this stock.
Back to China; the momentum game is in full swing for China equities. On the short-term, China has to have a meaningful expectations switch to change the mood investors have towards investing in this country. Importantly, sentiment has to get negative before values can start to move up. Negative sentiment must exist if momentum assets are to rise because surprise is key; results must be exceeded by expected numbers
If this all sounds silly as a fundamental investor, I can certainly understand that perspective. I'm talking about mood and sentiment and not data. But whether you are a fundamental or momentum investor, it's important to understand what drives price movements when news really doesn't change that much. Recognize that the reality of the markets is it is a combination of data and sentiment and both on the short-term matter greatly.
It may be crazy but sentiment matters more than ever before.
Michael Yoshikami, Ph.D., CFP, is CEO, Founder and Chairman of the DWM Investment Committee at Destination Wealth Management. Michael is a CNBC Contributor and appears regularly on the network. DWM is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutions and individuals around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009, 2010, 2011 and 2012.