OPINION: What’s all the fuss about Greece and China?
OPINION: There has been a lot of volatility in the markets of late mainly driven by Greece and China.
In regard to Greece:
The bottom line is that uncertainty around Greece is set to drag on for a while. But while the plight of Greece is terrible there are several reasons not to be too alarmed in terms of the global implications.
First, Greece is a very small economy that has been getting even smaller. It's just 0.25% of global GDP, it takes just 0.5% of Eurozone countries' exports and it's a trivial market for Australian exports. So the direct impact on the Eurozone, the global economy and Australia is virtually non-existent.
Rather the relevance comes via Greece's membership of the Eurozone common currency and its potential to destabilise it. On this front the threat is substantially reduced from several years ago. Other vulnerable Eurozone countries - namely Portugal, Ireland, Spain and Italy - are all now in much better shape than was the case when Greece triggered the Eurozone sovereign debt crisis over the 2010-12 period. Also, defence mechanisms to support troubled Eurozone countries are now much stronger than was the case in 2010-12 and investors are aware of this
The Greek crisis is now nearly six years old and private exposure to Greek public debt is now very low at just 50bn euros, with 80% of Greek public debt held by the IMF, the rest of the Eurozone and the ECB. Similarly the exposure of the global banking system to Greece is now low having fallen from $US300bn in 2008 to $US54bn last year.
In regard to China:
The Chinese share market has been seeing a pull-back since around August 2009. This made sense as Chinese shares were among the world's cheapest and the Chinese authorities were gradually starting to ease economic policy.
Some drivers of the pull-back include regulatory measures to stabilise the market that started to bite recently at a time when shares had become overbought, after a 150% gain over 12 months and were ripe for profit taking. Also an unwinding of the leverage built into margin loans.
As the downturn accelerated, there were concerns it could destabilise the financial system and economy. So Chinese authorities took a number of measures to stabilise and support the market. These included: lower interest rates; relaxed rules around margin financing.
While the significant drop in Chinese share values is unsettling for some investors, the impact on the Chinese economy is likely to be limited. The 150% 12-month gain in Chinese shares to the high had only a small economic impact so it's hard to see why the fall will. Second, Chinese shares are still up 90% from a year ago.
With the share market fall in China unlikely to have a major impact on Chinese economic growth, it's hard to see a huge impact on the global or Australian economies. Locally however with supply of commodities continuing to ramp-up, and Chinese demand lower, the secular trend in commodity prices is likely to remain down. Holding a longer-term view of the markets is always the winner over the panic often associated with short-term volatility.
For more Information contact Tim Maher at Maher Digby Securities Pty Ltd - Financial Advisers - AFSL No. 230559 (see advert Page 3). Ph: 0754411266 or visit our website www.maherdigby.com.au. This document was prepared without taking into account any person's particular objectives, financial situation or needs. It is not guaranteed as accurate or complete and should not be relied upon as such. Maher Digby Securities does not accept any responsibility for the opinions, comments, forward looking statements, and analysis contained in this document, all of which are intended to be of a general nature. Investors should, before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. We recommend consulting a financial advisor.