It’s fascinating in the investment world how quickly we move on from one major worry to the next.
It seems a short time ago that Greece was on everyone’s mind, yet now that an agreement has been reached (however temporary – we will return to this) this has been put to the back of the collective mind and been replaced by China. The most common question that we get at present is “but what about China?”
The recent Chinese stock market crash (correction, pull back, call it what you will) has been well publicised over here, appearing as a feature on numerous news reports.
It reminds me of my late Dad, who always used to phone when news headlines shouted about Billions Being Wiped Off Stocks. “You never call me about the Billions Being Wiped ON Stocks headlines do you Dad?” I grumbled. “I don’t know what you’re talking about son” he’d say. “I’ve never seen those headlines.”
“Exactly, Dad. Exactly.”
In a similar way, most people in the UK are unaware that the Chinese “A” Share market rose by over 100 per cent before it gave back its 30 per cent in the “crash”.
Performance of indices over 1yr
Source: FE Analytics
As usual, most private investors waited too long before joining the party as the market was rising and suffered burnt fingers as the bubble burst, but it has raised awareness about China and its effect on the global economy.
So how worried should we be by a Chinese slow down? Possibly not as much as we fear.
Just imagine that china does not exist
Hear us out on this one! We’re going to lean heavily upon a research note published by BCA Research for the following comments but it makes for an interesting perspective.
The perception that we have in the West is that China is now a global powerhouse and is somehow ever more central to the global economic wherewithal than is perhaps comfortable. Its influence is undeniable and one would be a fool to argue otherwise, but is it as influential as we think?
Comparing the Greek stock market and the Chinese stock market is like comparing Manchester United to Accrington Stanley in terms of size.
China has a market cap of some $5.9 trillion whereas the Greek stock market is smaller in terms of value than Expedia.com. Yet the influences of each may be misinterpreted. There is an argument that says that the Greek crisis is less about Greece itself and more about the wider entity that is the European Union and the single currency. 
What happens with Greece could be the canary in the coalmine when and if other peripheral European states enter a similar crisis. On a global scale, what happens in Europe is potentially far more damaging than a Chinese slowdown.
So this is where we ask you to suspend real life for a while. Imagine that China did not exist.
As BCA state, “One’s first reaction may be to say that growth would collapse as exports to China evaporate. But that is looking at only one half of the equation. If China disappeared, everything that China now exports would have to be produced elsewhere. Since China exports more than it imports, over the long haul, that could mean more employment in the rest of the world.”
Much depends upon whether your country is a consumer or a supplier.
The popular view is that China is the seat of global manufacturing and that it has been quite clever in lending the US the money (by buying Treasuries – the US equivalent of gilts and thus the vehicles by which governments borrow money) to buy Chinese goods, thus boosting the Chinese economy.
However, there is also the perception that China has been hoovering up the world’s commodities in order to urbanise its population and is thus the world’s major importer as well. How often do we hear of companies hoping to open the door to sell to China?
In reality, Chinese “true” exports are not as great as we may think.
A large share of Chinese imports are only intermediary as they go towards making something that is exported again. For example, China only adds about 4 per cent value to an iPhone even though there is a Made in China sticker on the back. Who would a slowing Chinese economy affect most?
Not the USA, whose exports to China only account for 0.7 per cent of their GDP. Britain, France, Italy and Spain would be similarly only slightly hit as we all sit around the 1 per cent of GDP figure.
Germany would hurt more, with a 2.6 per cent figure, but it is the rest of Asia and the commodity producing countries such as South Korea, Taiwan, Singapore, Malaysia, Japan, Brazil, Australia and Chile that would bear the brunt of a Chinese deceleration. This is why we maintain our negative stance on Emerging Markets.
So, when we’re asked about China, our reply is along the lines of yes, it is a concern, but there are maybe other things that we should worry about more in the short term.
Interest rates on the rise?
Notwithstanding our comments on China and its importance on the global economy above, we appear to be a lone voice when it comes to interest rate expectations in the US.
Everyone now seems to be fairly confident that rates are going to go up (not a lot, as Paul Daniels would say) in September, but we’re not so sure. Certainly, if they did, it wouldn’t be a great surprise to see them come down again fairly quickly in acceptance that the initial rise has been a mistake.
Why would you raise rates when you have a potential threat to global growth such as a Chinese deceleration, and with inflation still hiding effectively from view?
The US economy is not exactly steaming ahead and oil and commodity prices remain depressed. We get the sense that interest rates may go up simply because, well, it’s about time they did. And that would be a dangerous mistake.
The same goes for this country. There appears to be absolutely no reason for a rise, yet one of the MPC actually voted for one at the last meeting. Bizarre. Interest rates staying on hold for longer could see a market rally take place, even though it should perhaps worry more about the reasons behind rates staying where they are which would, by and large, be negative.
No one ever claimed investors’ logic was easy to understand.
They think it’s all over…
It’s not yet. Anyone who thinks that the Greek crisis is over should have a long sit down. Our view is that the conditions that Greece accepted (beyond grudgingly) in July are clearly unsustainable and will be challenged within months.
Performance of indices in 2015
Source: FE Analytics
Quite what happens next we don’t know, but life in Greece took a turn for the worse a few weeks ago and history shows us that the people don’t stay quiet for long in such circumstances.
Another chapter to the Greek Tragedy is just a few pages away, we fear.
Andy Merricks is head of investments at Skerritts Wealth Managements. The views expressed above are his own.
