Caution rules after big tumble in Hong Kong and China stocks in third quarter

Who has the courage to venture back into the stock markets?

Falls which have erased 30 to 40 per cent off benchmark indices in Hong Kong and China have left bruised investors nursing one of the worst quarters since the collapse of Lehman Brothers Holdings in 2008 when the financial crisis nearly cratered the global economy.

Many investors are fearful the worst is yet to come, fund managers and analysts say, and that further economic weakness or a sudden financial crisis in the mainland may send shares plummeting and destroy what little confidence is left in a market where daily turnover rates are scraping near six-month lows.

An increase in interest rates in the United States and a slowing Chinese economy are all real fears, says Michael Every, the head of financial markets at Rabobank.

But the biggest danger is further yuan devaluation, which "will set the cat among the pigeons in the markets as everyone tries to work out what that means", Every said.

For fund managers who still need to place client money, the outlook is one of hedged optimism. Five interest rates cuts by the People's Bank of China in less than a year mean mortgage and loan holders will have more money in their pockets to spend.

It takes three to four quarters to refinance after interest rate cuts, says Aaron Boesky, the chief executive at China fund manager Marco Polo Pure Asset Management, meaning "the impact of the biggest refinancing in modern history will hit in the next six months".