While the situation in Greece has captured the majority of the headlines over the past month attention has shifted toward the rapid decline of the mainland Chinese stock exchanges. (Look for an update on Monday regarding the developments in Greece which appear to be moving in a more positive direction)
Given that China’s economy is more than 70 times the size of the Greece we felt it important to provide some perspective about their recent market decline.
- The markets seeing the most dramatic declines are the Shanghai and Shenzhen exchanges which are not entirely open to foreign investors. An agreement in 2014 with the Hong Kong exchange began a process to allow foreign investment, but at this point the markets are still made up mainly of local participants and subject to heavy centralized influence.
- Due in part to stimulus policies incentivizing individual stock ownership, the Shanghai Index had risen by more than 160% at its most recent high in June, but has now seen a decline of roughly 30% in less than a month. While it is difficult to pinpoint a specific reason for the turn, asset prices that start to move in a parabolic fashion have a high tendency to exhaust themselves. (Sources: FactSet and WSJ)
- The pace of gains was fueled by sharp increases in margin borrowing and naïve speculation. Now losses for these speculators raise concerns for the continued growth of China’s economy. We believe it is hard to imagine this does not impact the Chinese economy to some degree, but we think it also needs some perspective relative to other financial market declines.
- The traded equity value of the Chinese exchanges is approximately one-third of their gross domestic product (GDP), which compares to most developed markets where stocks represent well more than 100% of GDP. Further, less than 15% of household assets are in equities (Source: Economist), far below other developed markets. We expect to see stories of small speculators wiped out by the swift decline, but we think these factors will mitigate the impact on the total population. In other words, the stock market in China is not nearly as directly tied to the broad economy as other countries.
- Aggressive action by the Chinese regulators banning selling by large holders and halting trading demonstrates they are very focused on the impact of the equity value decline. In our opinion this may not be most efficient way for a market to settle, but it may be effective in drawing out the adjustment period. One can see the immediate impact of Chinese government intervention as the global markets in general stabilized on Thursday following action that limited certain shareholders ability to sell shares of stock.
- We have not seen any significant changes in the trading of treasuries around this issue. At this time we do not believe there will be any impact on the US debt the Chinese government holds and we do not anticipate that they will sell large amounts etc.
Lowe Wealth Advisors did not attempt to directly participate in the euphoric run of Chinese markets. In the portfolios in which we held stocks in Asia our exposure is primarily through which focus on that region but diversify across multiple companies, sectors and countries and focus on the long-term growth potential. Consequently these funds have seen only modest collateral impact to the investments in this region and we may find new opportunities prospectively as a result of this action.
The fallout from the Chinese market declines concerns us for its impact on its economy and trading partners, but we believe the mitigating factors can make the fallout less severe than other stock market crashes in history such as our tech bubble decline.
We believe companies which benefit most from emerging Chinese wealth, like luxury goods and vehicles, commodities and building products could see the biggest demand impact, while basic goods, energy and health care might experience less change.
As these developments continue to unfold there may be adjustments to be made in the estimation of the timing or size of opportunities in the region, but in our opinion, China and many other parts of Asia are still likely to offer attractive relative growth potential over the long-term.
Lowe Wealth Advisors is an SEC registered investment adviser that maintains a principal place of business in the State of Maryland. The Firm may only transact business in those states in which it is notice filed or qualifies for a corresponding exemption from such requirements. For information about the registration status and business operations of Lowe Wealth Advisors, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.
This commentary is intended for the dissemination of general information regarding market conditions to Lowe Wealth Advisors clients. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results, and there is no guarantee that the views and opinions expressed in this report will come to pass. While any general market information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and should not be relied on as such or be the basis for an investment decision. Any opinions expressed are current only as of the time made and are subject to change without notice.