Greece and China – Market Volatility

Markets have reacted favourably after Greece agreed to the demands of European creditors in exchange for a bailout of 86 billion euros to keep the country in the eurozone.

As reported, Greece needed the money to renegotiate their debt, and to rebuild their bank’s capital. Without it, the country faced a financial black hole. As many commentators said previously, this was always going to happen, it was a matter of when.

The key development will now be, will it work this time or are we just delaying the inevitable? Firstly their parliament will have to pass these measures by Wednesday Europe time, including tax hikes (increase their equivalent of our GST), pension reform and selling some national assets.

Last week their referendum vote was 60/40 not to accept measures placed on them. Whilst the Greek Government made much about letting their people ‘have their say’ it seems that the overall pressure to remain in the eurozone has swayed their thinking – and got them seeking the reforms.  However, it is important to note that not all European nations are in line with assisting Greece, with a few of the bigger nations (who were instrumental in setting up the deal) no longer trusting Greece and its government/s. Time will tell how things settle down in this regard.

On the other side of the world China has also caused volatility in markets. This seems to be a case of the central Chinese authorities getting it wrong. They are endeavouring to shepherd the rising middle class into a higher standard of living through wealth creation policies government influenced.

It’s complex – but in simple terms, some time ago the Chinese Government allowed the population to use margin lending1 to allow leveraged investing into the Chinese mainland share market known as the Shanghai ‘A’ market. The population took up this relaxation of financial control like ducks to water.

Money poured into the Shanghai ‘A’ market with a staggering 5.8 million new share trading accounts opened in just March and April this year alone.

85% of all share trades were associated with margin accounts.

Novice investors created a bubble. It was reported farmers stopped tending their animals to check on their stocks.

The bubble has burst – so quickly in fact, that the government has again intervened by introducing a range of measures to stop what they started. Some say this has stopped the rout, some say not.

As far as our clients investments are concerned, while the managers we use do have some investments in Chinese businesses, they are not through the Shanghai ‘A’ market, but the Hong Kong ‘H’ Market. Chinese companies can have two listings, on the Shanghai ‘A’ market and the Hong Kong ‘H’ Market. The mature, more regulated Hong Kong market is experiencing falls, due to sentiment, but nowhere near the levels on the Shanghai exchange.

Which brings us to volatility.

As renowned US investor Warren Buffet said earlier this year,

“Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time… this lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk.”

His point here is that volatility occurs often for a variety of reasons but that doesn’t inherently make investing risky. A properly diversified portfolio across all asset classes and held for a sensible amount of time will reward investors. The fundamentals of businesses – competitive advantages, debt structure, sales capacity, regulation, market share and the trading environment tells more about risk than volatility does.

If you would like to discuss your portfolio or require any clarification, please contact us.

  1. margin lending – borrowing from a bank to buy shares using the market value of the shares as the collateral. If the value if the share falls below the loan, then the bank calls immediately for a part repayment of the loan – a margin call.

“This document or website contains general advice only. You need to consider with your financial planner, your investment objectives, financial situation and your particular needs prior to making an investment decision. Charter Financial Planning Limited and its authorised representatives do not accept any liability for any errors or omissions of information supplied in this document except for liability under statute which cannot be excluded.”

Leave a Comment!

Your email address will not be published. Required fields are marked *

Related posts