Interest rate differentials between the US and Australia are set to narrow further, creating Foreign Exchange opportunities for investors
Ructions in Greece and China are worrisome for investors but are unlikely to have a material impact on markets or on asset allocation recommendations.
Ructions in Greece and China are worrisome for investors but are unlikely to have a material impact on markets or on NAB Private Wealth’s asset allocation recommendations for investors.
The combination of the Greek “No” vote and panic in the Chinese equity market has investors worrying about the impact on the European and Chinese economies. We are watchful, and have suggested investors may want to hold a little extra cash while markets experience higher volatility. However, given there’s little evidence that either event could change the shape of the global economic cycle, there’s no need for medium-term investors to drastically re-engineer portfolios.
First, to Greece, where the risks of an exit from the Eurozone (“Grexit”) have risen, exacerbated by the landslide “No” vote in the July referendum. Our base case is that Greece remains in the Eurozone. However, if against all parties’ interests, Grexit were to occur, European financial markets would suffer a temporary setback (possibly a fall of around 10%) from today’s levels. However, the European Central Bank would be back to a “whatever it takes” response to any signs of trouble in countries like Portugal and Spain. Accordingly, scope for a serious contagion is limited in our view, while the medium term investment case for the European economy continues to look reasonable to us. In fact, we would expect dip buying to kick-in early on in the event of a severe Grexit-sell-off.
In China, the Chinese equity bull market, looks to have suffered a terminal blow to sentiment. In the year to 31 May, Chinese A shares rose 126% which came at the same time that economic growth slowed and industrial earnings stagnated. So, what drove the bull market? Excessive margin lending in the share market which has since fallen decisively, with Chinese A-shares falling 32% since 12June. However, despite the fact that Chinese authorities have not managed the sell-off well, including some ill-conceived measures to limit the slide, Chinese equities are not a large part of household wealth. Therefore, many investors are still well ahead and, while economic growth has slowed, signs of stabilisation are emerging, for example, property prices have risen.
© National Australia Bank Limited. ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.