World Markets at a Glance
In this week’s issue
- The Greek government and its creditors continue to work on a meaningful solution.
- China’s stock market remains volatile with some 1400 stocks now suspended from trading.
- Optimism surrounding a resolution to the Greek crisis buoys up the global equity markets.
- In the FX market the euro strengthens against the yen and dollar on hopes of a Greek deal.
- Concerns over the Chinese economy have an overall negative effect on commodity prices.
- Irrespective of the Greek and China dilemma global equity markets remain the best option.
What does this mean for the markets and asset classes?
“Hopes of a resolve between Athens and its creditors lift stocks higher”
Last week saw further progress being made between Athens and its creditors, indeed, the latest proposal from Prime Minister, Alexis Tsipras, was sanctioned by the Greek parliament and then sent to the Euro Group for approval. Given that this current proposal by Athens appears to be very similar to that of the creditors, which was rejected by 60% of Greek voters in the recent referendum, seems quite extraordinary, however, the likelihood of the Greeks securing a third and final bailout did help equity market sentiment, particularly in Europe. Equally, in terms of the bond markets, government bond prices retreated, whilst in the FX market the euro strengthened against the yen and dollar.
Chart of the FTSE Eurofirst 300 ex UK [TR] Index for 2015
Understandably, any sign that a resolve could be found was greeted with some relief but it was also thought that the hardliners in Berlin, and the Greeks who voted against further austerity, might still voice some anxieties given that the only real difference in the new proposal appeared to be in the overall packaging. On the face of it, all the Greeks have done is move straight into negotiating for a third bailout, likely to be in excess of €70 billion, rather than accept the creditor’s conditions for the completion of the second bailout, with only €7.2 billion of funding remaining. In addition, Tsipras was hopeful that there will be some significant debt relief.
If indeed such a bail out was approved by the European Union members then it would be likely that the European Union would finance the bulk of the money from the bailout fund, the European Stability Mechanism, with the rest coming from the International Monetary Fund.
Although the outcome from the talks over the next few days is very crucial the bigger issue that surely engulfs the European Union is the actual future surrounding the euro, can it really survive over the longer term without a full political, fiscal and banking union in place. Clearly, as we have seen with the likes of Greece, and other peripheral countries, financial stability and debt reduction is vitally important for the longer term well-being of the EU and not the continual “sticking plaster approach” that appears to be the currently used when a member faces financial difficulties.
Obviously, on an economic perspective Greece should never have joined the euro back in 2001; government borrowing has soared leaving the country unable to pay its way and when the global financial crisis hit, the country suffered, and it has required financial support from the European Union and IMF ever since. Quite simply put, Greece should not be in the same currency union as the likes of Germany, France, Netherlands or indeed Finland.
Another country that appears to be having some current difficulties is China; clearly its economy is changing and therefore its historic growth rate unstainable. Unquestionably, Chinese growth has been built around exporting cheap goods to the rest of the world but now competition from other parts of Asia has made them less competitive. Also the reliance of huge infrastructure projects is becoming a problem; there are only a certain amount of roads, bridges and airports they can build.
Therefore, the country needs to shift itself much more from an export driven, to a consumer based economy; this transition will obviously affect its growth rate, and in turn, create some uncertainty and volatility within its market. China has the world’s biggest market of consumers consequently it needs to increase its domestic consumption rate which over the past 10 to 15 years is likely to have been in the region of 35% to 40%, in the United States it’s around 70%.
In terms of recent actions both the Chinese central bank, and the government, have been actively cutting interest rates and announcing some unexpected measures to try and stabilise their economy, equally, legislation changes have been responsible for an increase in borrowed money flooding into their stock market over the past 12 months, which in turn, has seen the market rise by 150 per cent between June 2014 and June 2015,this flood of liquidity has seen the amount of officially sanctioned margin trading in the market rise from 403 billion yuan to 2.2 trillion yuan.
Unfortunately, this has now led to the market becoming a captive to these aggressive state support measures and consequently some 1,400 stocks, or about half of the listed companies on the market, are now suspended from trading. This has meant that the market has become very volatile on a day to day basis; indeed, between the 12th June and the 08th July Chinese stocks fell by almost a third.
What’s more, Beijing have now become rather concerned about the market and over the past few days have announced new measures such as six month selling bans on big stakeholders positions, and requesting companies to submit plans to stabilise their stock prices to try and curb some of the speculative “hot money” trading that has been responsible for what has happened over the past few weeks.
Chart of the Shanghai Stock Exchange Composite [TR] Index for 2015
Certainly, last weeks renewed hope surrounding Greece, and its creditors, did help to push stocks higher on many exchanges, including London, although saying that, the FTSE 100 Index has suffered from the impact of significantly lower commodity prices and the collapse in worldwide metal prices, which in turn, is much correlated to the world’s largest consumer China. Arguably last week’s moves would seem a classic case of this as commodity prices from metals to crude oil plunged to multi-year lows before recovering some of their lost ground.
Chart reflecting selected commodity price movements in 2015
Admittedly, the UK’s mid and small caps indices have certainly been less affected by International events and have out-performed their larger brethren over the first six months, and of course many of these companies have different business characteristics, tending not to be affected so much by complicated corporate structures, and of course they do have much greater potential for growth.
Chart reflecting selected UK indices for 2015
“Eurozone leaders agree to a deal with Greece”
It has just been announced that Eurozone leaders have finally agreed to a deal with Greece after a long week-end of negotiations, and whilst the exact details of the deal are still being released the Greeks will need to present the package to the Greek parliament for approval.
Maybe, a Grexit has been averted and that the Greek banks will once again be recapitalized by a Greek Asset Fund, but regardless of this outcome, the European equity markets are still compelling as an investment region, given that the European Central Bank will continue with their monthly QE programme for the foreseeable future, and that from valuation perspective European equities look attractive.
Unquestionably, if the Greeks had exited the euro we would have seen some turbulence, but the markets were very aware of this possibility, and any weakness that might have been experienced would and should be regarded as a good buying opportunity.
Peter Lowman Chief Investment Officer
Peter Lowman has been in investment management for over forty years and prior to becoming Chief Investment Officer for Investment Quorum he worked within larger asset managers, primarily as an Investment Director within Cazenove’s. He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Investment Committee. This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.