Summary: The ructions on the Greek and Chinese stockmarkets over the past week have created volatility on global markets, but investors should view any sharp downturn on the Australian market as a buying opportunity.
Key take-out: It’s not a time to panic. Investors should hold their nerve until we know more about Greece.
Key beneficiaries: General investors. Category: Economics and strategy.
For investors it’s a key time to be very aware of what’s going on across global markets.
This week two issues will weigh on the market:
- One is the surprise decision by the people of Greece to vote ‘no’ in Sunday’s referendum.
- The second is concerns about the Chinese equity market correction. Stocks in Shanghai have collapsed recently -- down sharply in six of the previous seven trading sessions -- with average daily falls of nearly 5 per cent. Over the last month, Shanghai stocks are down nearly 30 per cent. (China’s drama would have received a lot more attention, except that Greece grabbed the headlines).
Despite this turn of events -- the best advice for investors is to be ‘alert but not alarmed’. Investors need not really do anything. What we shouldn’t be doing is panicking or making any sizeable portfolio readjustments just yet.
What we saw today on global markets -- the All Ords finishing the session down 1.4 per cent while markets in Asia fell between 0.4 and 4 per cent -- is really just a kneejerk response to uncertainty. It’s fine for traders or computer algorithms to react to every news item, but not every reaction is relevant for investors. As the old saying goes, if you can’t take a 10-20 per cent fall on the market, then you shouldn’t be in it.
(To see more on what the Greek drama means for the markets catch up with the ‘Inside Line’ webcast special from Monday afternoon -- embedded above this story,with Alan Kohler, James Kirby and Marcus Padley).
First things first -- we need to realise that the ‘no’ vote in the Greek referendum need not mean anything substantial. The referendum wasn’t about Greek membership of the Eurozone -- something supported by the majority of Greek citizens and the majority of parliamentarians as well. The question that Greece voted on was instead very specifically about one proposed package -- here it is below:
Should the proposed agreement be accepted, (which was submitted by the European Commission, the European Central Bank, and the International Monetary Fund in the Euro group of June 25, 2015 and which consists of two parts) which constitutes their unified proposal? The first document is entitled ‘Reforms for the Completion of the Current Program and Beyond’ and the second ‘Preliminary Debt Sustainability Analysis’.
What the vote wasn’t was a rejection of austerity or reform. So from the government’s perspective, the no vote simply rejects that proposed agreement -- it doesn’t rule out another agreement being made. That could perhaps be as soon as tonight. The Greek Prime Minister, Alexis Tsipras, for his part seemed keen to recommence negotiations immediately. (Yannis Varoufakis, the outspoken former Finance Minister, had said that an agreement would be made this week. But he resigned from his post late yesterday, so we will have to put that statement to one side).
Either way, the Greeks would be keen for a resolution. Greek banks face insolvency and the talk is that if a deal isn’t made soon, then the daily withdrawal limit Greeks are allowed will be cut from €60 a day to €20.
The real issue is whether the rest of Europe will still want to negotiate with Greece. On that, we just don’t know the answer -- but there is no point pre-empting the result. Certainly the US is putting a lot of pressure on the Europeans to cut a deal with Greece and offer debt relief. Assuming the Europeans are willing to continue to talk -- and the Greek’s are amenable to reform -- then there is good chance a deal will still be made soon.
Even if there isn’t though the main thing for investors to remember is that if the worst happens then, and as I discussed in my June 17 piece, the potential for sustained contagion is small. You can see this by the comparatively muted response of Italian and Spanish bond yields. This market simply isn’t concerned. Sure, yields are up -- the Italian 10-year yield is up over 1 per cent over the last four months. Then again, even after that, at 2.24 per cent, it’s still much lower than the Australian equivalent -- at 2.92 per cent. Now even if Italian and Spanish bond yields spike another 1 per cent over coming days, it still leaves them at very low yields and well away from their peaks in 2011 -- of over 7 per cent.
If yields do start pushing higher still, then the European Central Bank has a number of ‘tools’ available to provide huge sums of money to banks or governments if they have any problems. Remember that the issues outside of Greece that we saw in 2011 and 2012 were never about insolvency or too much debt. It was always about liquidity -- governments and banks, especially in Spain and Italy, being able to fund themselves at reasonable rates. Thought of another way – it was about bond markets working in an efficient manner. Europe has dealt with these issues and neither Spain nor Italy (nor their banks) need worry about their ability to find funds if markets panic again.
It’s in that context that the decision taken by China to prop up its stockmarket isn’t all that unusual either. Several measures were announced over the weekend with the intent of arresting the recent stockmarket slump. Notionally, it was a sign that authorities are concerned about a crash. Measures include:
- A decision by the central bank to provide funds to a state owned entity -- China Finance -- which provides margin loans to brokers.
- The establishment of a ‘market stabilisation fund’ by 21 of the nation’s largest brokers, who would use these funds (just under $A30 billion) to buy exchange-traded funds (covering the largest stocks on the market) in times of excess volatility. They also noted that they wouldn’t sell shares if the Shanghai Composite remained below 4500 (currently at 3766).
- In addition, 28 companies that had been given regulatory approval to conduct IPOs this year, said they would delay these raisings. This was done to redirect money back into the secondary market.
Viewed by themselves, these decisions are alarming and to be fair they do hint at some kind of panic.
That is until you realise that such stabilisation funds are by no means unusual -- just look at the facilities and mechanisms -- programs etc the ECB has in place. All with very fancy names but with the same goal in mind. To buy government bonds and provide banks with unlimited amounts of cash -- if they need. Similarly, the US has its own funds to buy foreign exchange, gold -- anything really -- while their use through the rest of Asia has been widespread – by Japan, Thailand, South Korea and Hong Kong.
Similarly, the measures taken by Chinese authorities follow a surge in the Shanghai Composite -- which is still more than 80 per cent higher for the year. Perspective is important.
Even if the market is headed for a further slump, the real economic implications would be limited -- just as the 100 per cent-plus spike had few real economic implications. If it didn’t matter on the way up, why would it matter on the way down?
The fact is, the Chinese stock surge over the last year or so, has had no significant flow-on effects to Australian stocks or the Australian economy. The issue is, at its core, one of portfolio allocation between stocks and property in China -- for wealthy individuals. It doesn’t even impact on the broader Chinese populace. These events get plenty of news and doom and gloom -- yet it simply doesn’t matter for Australian retail investors.
So while the mood early this week is glum and things look terrible at a casual glance, it’s just more noise really. Especially compared to what we’ve seen in the past in 2010-12. Next to those, these market ructions are nothing and investors should hold their nerve until we know more about Greece.
At this stage I’m still of the view that any major correction is a buying opportunity. An entry point is the harder question. While that point may not be now, it may not be far away either.