China stock-market drop to get worse before it gets better — but it will rebound eventually

The greatest one-day drop in Chinese stocks in eight years on Monday is not a signal that markets have bottomed out in China, according to financial advisers, who nevertheless urge investors — including those with China exposure in their portfolio — to keep a long-term perspective. “It would be best to stay away from Chinese stocks for now,” said David Kudla, founder and chief executive of Mainstay Capital Management. “Efforts in China [to reverse the bear market] haven't worked.” His investment advisory firm started selling its Chinese positions in May and eliminated its last-remaining investments in June. Before that, the firm enjoyed gains from China's nine-month bull market, he said. The Shanghai Composite Index fell more than 8.5% on Monday after China's markets had been relatively stable for nearly three weeks following an effort by the government in Beijing to stop a market selloff. The rout marked the largest one-day fall since Feb. 27, 2007. Before the Chinese government announced a rescue plan on July 8, the country's markets had fallen about 30% from their highs in early June. NO IMPACT ON INVESTORS' LONG-TERM HEALTH Fritz Brauner, president of The Brauner Company, said he trusts the fund managers he's chosen to make the best moves in those markets, while he keeps investors focused on the long term. “I help clients keep perspective and not get distracted, even by this pretty spectacular news,” he said. “This won't have an impact on their long-term financial health.” In recent weeks, some fund managers had begun selling off China shares. (More: Major index punts on adding China's booming markets to global indexes) China's rout on Monday pushed European stocks down 2% and the Dow Jones Industrial Average down about 150 points, or 0.86%, as of 1:30 p.m. New York time. “Valuations are so high; air is not done coming out of the Chinese stock market bubble yet,” Mr. Kudla said. Nigel Green, founder and chief executive of deVere Group, said the latest drop shows investors remain uncertain. He said the Chinese government will need to do more to boost domestic consumption and avoid a more significant economic slowdown. 'CHINA-PROOF' PORTFOLIOS Mr. Green said investors “should consider 'China-proofing' their portfolios to manage risk and benefit from the inevitable buying opportunities. "The best way to achieve this is to ensure that portfolios are properly balanced across regions, assets and industries and to work with a good fund manager who will be able to help take advantage of these opportunities,” he said.