The Chinese economy is weakening - What does it mean for you?

At Hunter Financial Planning, we always like to keep you informed about what is happening in investment markets. We know that with the wealth of information available, you may be reading and viewing information that may not tell the whole story. The information below is specifically to help you understand what has been happening with markets over the last few weeks.

Equities have begun 2016 with many major global indices recording their worst start to a calendar year on record. Indeed, the benchmark for global equities, the MSCI World ex Australia ($A Hedged) Index, fell by more than 6% for the week (to 08 January 2016). Australia’s S&P/ASX 200 fared little better and is now at its lowest level since mid-2013, as market volatility climbs to heights not seen since August 2015 and, prior to that, in the European financial crisis of 2011-2012.  

Why did it happen?

There are a number of factors contributing to the events of the last few weeks:

1)    The Chinese economy is weakening – this is not necessarily new news. Indeed, concerns over the Chinese economy were at the heart of the market volatility in August 2015. So what’s different now?

a.     The Chinese economy continues to deteriorate and is slowing more than was previously expected. Recent economic data regarding manufacturing, services and inflation, for instance, has been disappointing. As such, the official target for GDP growth of 6.5% looks increasingly optimistic.

b.     Devaluation of the Yuan. Since the Chinese government loosened the peg to the U.S. dollar, we have seen the ongoing devaluation in the Yuan, which has accelerated in recent weeks. Whilst devaluing their currency makes their exports more attractive, the risk is that the Yuan devaluation happens so quickly that it destabilises the economy or spurs further market volatility.

c.     The Chinese stock market. The rapid rise in the Chinese stock market in recent years was one underpinned by cheap money. As this has unwound, in combination with the aforementioned factors, significant volatility has gripped the Chinese market. In recognition of this, the authorities introduced a “circuit breaker” mechanism but rather than restore order to the market in times of stress, the new initiatives actually intensified selling and have since been removed.

2)    Oil price. After falling approximately 45% over the 2015 calendar year, the major oil indices have fallen a further 10% in 2016 as collapsing Chinese demand meets rising oil inventories and surging supply. This position has been exacerbated by OPEC’s December decision to remove any production targets, effectively giving member nations the authority to produce (and sell) as much oil as they want. Further weighing on the oil price, is its negative correlation to the U.S. dollar, which continues to strengthen.

3)    As if the above is not enough, geo-political developments in the Middle-East, Europe and the Korean peninsula are further contributing to the negative sentiment.

What this means for you?

The recent stock market movements have understandably caused concerns amongst many of our clients. Indeed, as it stands, it remains extremely difficult to forecast the short term direction of markets and to predict when the current levels of volatility may subside.

Whilst we are mindful of current events, we are encouraging all our clients to look past the short term noise and emotion, and focus on your longer term objectives. The reason for this is that periods of heightened volatility are not uncommon, but by their nature, have the potential to cause you to lose sight of the bigger picture, often to the detriment of your investment outcomes.

In periods of volatility, it is important to remember that markets rise and fall quickly, particularly over the short term. It’s best to avoid knee-jerk reactions and the risk of ‘locking in your losses’—because you don’t truly feel the pain of market declines until you sell investments at a low. Sometimes, short-term volatility provides good buying opportunities.

We feel that the fundamentals in the Australian economy are still strong, with strong employment rates, low interest rates and companies are continuing to pay solid dividends. Because of this, we are urging all of our clients to remain calm and remember the following tips:

  • Diversification – As a standard, our clients are invested in a variety of asset classes, not just the share market. Different asset classes perform differently over time which helps to offset market volatility in a particular asset class.
  • Long term investing – Superannuation is a long term investment, with many investment objectives being over 10 years. It is expected that there will be periods of volatility but over the longer term markets typically recover from short term movements.
  • Stick to your plan – We have tested your investment risk profile and build this into your financial plan. We regularly review your investment profile and financial plan to make sure it still reflects your current position and objectives. Like most plans, it makes sense to stick with it for the long term.

 

As always, if you would like to evaluate your specific situation, contact us on (02) 49434876.