Market Update – Greece & China
When markets are nervous they have a habit of interpreting all news negatively and of course the reverse occurs when markets are bullish. At present nerves have taken hold primarily due to the uncertainty with respect to Greece. However further nervousness has emerged over a recent share market correction in China. We thought we would provide some context to the discussion.
The markets have generally reacted benignly to the potential for a Greek exit from the Euro however this has still created some uncertainty and added volatility. As we have written, a Greek exit is unlikely to have a significant economic impact given its small contribution to European GDP and the mechanisms in place to handle the contagion impact on other markets. The bigger risk is the potential political risk. If Germany was to roll over to Greek demands then this would likely encourage other groups in Italy, Spain and Portugal to make similar claims for debt relief. The lack of panic in European financial markets increases the pressure on the Greeks to make a deal in our view (if the Greeks behave rationally). However there is still a reasonably high possibility they will exit the euro. If this were to occur, we would anticipate the economic impact as modest. However European confidence could be impacted and market uncertainty might well linger for a while longer. However we do not see it as having a lasting impact on the global economy (so long as the political fallout is contained).
The Chinese market has had a strong correction in recent days. There are numerous newspaper reports describing the fall as “China’s Great Depression” etc. We make the following comments:
- The market has corrected but the only people who have lost money are those who have bought since April.
- The market was very frothy nearly doubling over March to June. This move up was speculative with margin lending increasing as investors chased the returns. The move up barely raised an eyebrow from global investors.
- The real economic impact comes from those who had geared up losing real wealth and any future impact on confidence. Actual economic data has been soft (but it has been soft all year) and the Chinese Government continues to stimulate the economy.
- The size of the Shanghai Index is small and represents only a small proportion of the Chinese economy relative to the size of markets in other developed countries.