Well, with all eyes on the dramas in Greece, for some it’s overshadowed the more worrying concerns coming out of China.
And if you feel Greece is Europe’s problem, you’re probably not alone – but China is a lot closer to home and the slump has triggered fear of a worrying slowdown in the country’s economy.
Thanks to ANZ for the following information on what’s happened and an idea of maybe what lies ahead.
Chinese policy makers have released several new measures to halt the slide in share prices. What’s going on?
From go to slow(er)
It is no secret that the Chinese economy has been slowing since 2010, though it continues to grow at a much faster rate than developed economies. Recently China’s growth was reported to be 7% for the first three months of 2015, but real activity indicators suggested growth momentum was far more sluggish.
Before the recent slump, the Chinese share market had more than doubled since June 2014 and appeared to be helping to stabilise the Chinese economy. Property transactions and home prices picked up as consumer confidence improved and Initial Public Offerings (IPOs) re-started in the middle of last year, providing access to capital for many private companies. There were also anecdotes that the ‘wealth effect’ from the share market was providing a boost to domestic consumption.
China’s slowdown is partly a result of the government’s desire to focus on transitioning from an investment-driven economy to one that is more dependent on consumption. At the same time, the large stimulus program used to support growth during the Global Financial Crisis (GFC) had left Chinese local governments with large debt burdens, making it hard for them to fuel further growth with more credit. Meanwhile, banks remain wary of lending further to companies to help them grow, despite multiple interest rate cuts and the slashing of the amount of money banks need to keep aside for lending.
Following the biggest three-week rout in China’s main share market index (the Shanghai Composite Index) since 1992, Chinese authorities sprang into action to stabilize the market, fearing social and economic instability if things worsened. Besides taking action against short sellers, they relaxed margin lending rules, cut trading fees and slowed the pace of IPOs. Over the weekend, China announced that a group of brokerage firms will invest RMB120b (US$19.3 billion) to set up a market stabilisation fund. The Chinese central bank will also provide short-term funding to the state entity which makes margin loan financing available to the brokers.
It remains to be seen whether the authorities’ measures will have a meaningful long-term impact. While the valuation of the broader market is approaching more reasonable levels after the recent decline, shares in smaller companies (‘small cap stocks’) and technology-focused shares are overvalued and the bubble may be about to burst.
We see issues in China as being far more important for financial markets than the debt crisis situation in Greece. While uncertainty around whether Greece exits the euro zone is likely to cause market jitters in the coming months, we don’t expect this to have a major impact on markets longer term. However the situation in China has the potential to be much longer lasting given its importance in the global economy, especially for Australia as China is its largest trading partner.
It is not so much the Chinese share market falling that’s concerning, but rather what follows. If the share market drop harms business and consumer confidence in China, then it would worsen the current slowdown. Declining wealth may also hinder consumer spending and slow the economy’s transition. Moreover, the weaker share market will make it more difficult for businesses to reduce debt levels down to more manageable levels without weakening growth, as seen in developed economies post the GFC.
We have been expecting a slowdown in the Chinese economy and have a negative position to emerging market shares. We have also been fairly negative towards Australian shares and the Australian dollar because the Chinese slowdown sways commodity prices downwards, and the Australian economy as a result.
That said, we consider Chinese policy makers will be successful in stabilising growth at a reasonable level, though more action may be required.
We hope you found this Market Flash a useful insight into the recent share market events in China and our investment views.
What has happened?
It’s déjà vu for investors as the birthplace of Western civilization, Greece, once again teeters on the edge of economic collapse.
It marks the latest in an ongoing series of crises for the country after major debt restructuring packages were struck in 2010 and 2012.
But with negotiations between Greece and its creditors breaking down, markets have declined amid concerns of a potential Greek default. However, it’s important to keep the situation in context.
“We will respect the decision of the Greek people, whatever it may be.” Greek Prime Minister Alexis Tsipras.
The size of the $US240 billion Greek economy is about half the size of the New South Wales economy. Greece owes creditors approximately $US350 billion. By comparison, total US national debt currently stands at approximately $US18.6 trillion.
Possible macro-economic impact
European institutions and countries may prove they are able to absorb the losses of a Greek default, although Greek citizens would have to bear the brunt of a failed economy and potential exit from the European Union.
Markets around the world are inter-connected, so concerns lingers about the potential knock-on effects if Greece leaves the EU, with some commentators wondering whether other struggling countries could follow, prompting further losses and destabilizing in Europe. The ongoing uncertainty has prompted a new round of market volatility and uncertainty.
Key Points: The Greek Crisis
- Greece’s current bail-out program, last negotiated in 2012, expired on June 30.
- Greek Prime Minister, Alexis Tsipras, walked away from negotiations with the European Commission and instead called a referendum for July 5 to let the people decide.
- The Greek stock exchange and banks have been shut with ATM withdrawals limited to 60 euros a day.
- While Tsipras supports a ‘no’ vote to use as a bargaining chip at the negotiating table, European leaders have warned it would likely lead to Greece’s exit from the EU.
How will this affect my investment portfolio?
The Greek referendum announcement surprised investors, prompting a decline in the value of the Australian and New Zealand share markets. Meanwhile, Australian, New Zealand and US bond yields – typically a safe haven for investors – also weakened.
This response is reasonable: markets are expected to become more volatile when the outlook becomes uncertain.
“The confidence effect of a deal, the predictability it would bring, together with the injection of liquidity into the economy from disbursements will restore job creation and growth.” European Commission President Jean-Claude Juncker.
What should I do?
“The IMF also will continue to carefully monitor developments in Greece and other countries in the vicinity and stands ready to provide assistance as needed.” IMF Managing Director Christine Lagarde
While an increase in short-term volatility is to be expected, it’s important to remain focused on your medium-to-long term investment goals during times of uncertainty. I continue to look to keep your investment strategy on track, and note that the Wealth Planning Partners team are always available to discuss any questions you have.
Did you ever think that you may have some long lost money in bank accounts that you’ve forgotten about. The Australian Securities and Investments Commission’s (ASIC) MoneySmart website has an unclaimed money search.
There is around $1 billion in lost shares, bank accounts and life insurance.
Unfortunately, when I did a search I couldn’t find anything in my name, which was a little disappointing, but also means I must keep a pretty good tab on where things are.
But, here’s a tip. Run a search with only your surname. You may find relatives that have unclaimed bank accounts and they may just be very grateful for the discovery. I found over $2, 200 sitting there for my brother-in-law and have left a message to let him know… And $5 for my father-in-law and $78 for a client.
Hey, it all adds up! Give it a try here: https://www.moneysmart.gov.au/tools-and-resources/find-unclaimed-money/unclaimed-money-search
Good luck with the search!
1. Never learning to budget.
Every dollar earned does not need to be spent. Have a financial plan and rigorously stick to it. Budgeting also means having a regular saving plan in place.
- Buying a new car and thinking it’s the most important thing in your life right now.
Most 20 year olds will try and move heaven and earth to have that new car, but when the novelty has worn off and the bills start arriving, most wish they had settled for something more affordable. Payments of a new car lasts for years while the car drops in value every year, not always a smart thing to do when you are just starting off in life
- Thinking that retirement is to far away and not planning for it now.
Many young, give absolutely no thought to retirement, as 65 is so far away. Yet if we start early by taking an interest in Superannuation and personally contributing to it, even in small amounts, the benefits will speak for themselves down the track. It will make all the difference between having a comfortable one as opposed to struggle street. And think of the compound interest over the next 40+ years!
- Trying to keep up with your friends.
Having the latest gadget every time one comes out or the newest iPhone is a never-ending pursuit. Your phone is already outdated the day you buy it so think carefully and maybe try waiting just that little while longer before updating your hardware.
- Not paying off your student loan.
This debt can hand around your neck for many years. Try paying it off as soon as possible, financial freedom will soon follow.
6. Not having a plan for post university life.
Think carefully about your chosen career, how much will the debt bill be at the end of your student days? How easily will you find a job? Always have a plan and then have a plan B as well.
I read a recent article about why so many people feel they cant afford to save money and thought I would share some of the insights.
It seems that for some, saving money could feel like losing money. It feels like they seem to just be putting money somewhere, never to see it again. The article in turn, gave this advice, it said “picture your prosperity, have a goal when saving, whether for a house, new car or even that trip overseas.”
The problem seems to be how we view money. It’s our perception of it that can make all the difference. For example, when a group of people were asked if they could save 20% of their income, most said no it was not possible. When asked the question in a different way to another group, they responded very differently to the first group. They were asked, if they could live on 80% of their income and most in this group said that it would be possible.
It seems that when the focus changes so does the way we think about saving. Think about the money you do have as opposed to the money you don’t have.
One suggestion was to try and automate your savings plan, your bank can easily arrange this or you can simply set it up online.
There you go!! No more excuses!! Start today!!
For more tips on saving, check out our 12 part series coming to you month by month throughout 2015.