Watch the USA 1st and China 2nd
The media love to quote “billions wiped off markets” but to get a real perspective we need to look at percentages instead. Markets are down about 10%, but a properly diversified balanced portfolio is only down about 2% to 3%, (after a couple of 10% + years).
It was also reported that this will hurt KiwiSavers, which is misleading. Most KiwiSavers are medium to long term, and nearly everyone is adding money monthly (averaging in) so savers get more shares for their monthly contributions when markets are weak.
The recent market volatility surprised seasoned traders and has surprised me too. An Australian politician commented that is “flighty money moving continually from bonds to shares, forward and back, speculating on various factors” – he may be right.
China’s recent major economic expansion has boosted world confidence and boosted share markets, since markets love strong growth forecasts.
However no country can keep up a 7% to 10% growth rate and sure enough, China has now slowed down, much to the consternation of addicted China watchers.
Jonathan Pain is a prominent Middle East and Far East student and commentator. He predicts that Chinese growth will fall to 5% to 6% which is just fine for a maturing economy. However even he admit China is all he is thinking about …………………..
The biggest global economy, the USA, is on track for a very good 3.7%. So why all the fuss about China? Even 4% to 5% growth in China and 3.7% in the USA would sounds fine to me.
China watching had become an unhealthy obsession for markets but China will keep growing, albeit at a slower rate.
The USA is still the main driver of the world economy and they are growing at 3.7% which is very strong for a developed economy.
Germany is doing well as the Euro suits them (weaker than a Deutschemark would be, so helps their exports).
The UK seems to be doing well, some even call it a mini boom, as the Brits have been allowed to access 25% of their pension funds at age 55 (weird government policy).
There is plenty of room for world growth, indeed it has hardly recovered from the GFC.
The huge emerging middle class in India and China will keep demanding global goods and services at an ever growing rate, which is great for share markets.
The Chinese government (Communist Party) is fearful that the masses will rise up against them if they do not deliver an ever improving quality of life. Hence they will do everything they can to keep their economy on track for steady growth.
Not at all like 2009
The current “correction” is not at all like the 2009 GFC, which was initially caused by crazy lending on property, and a boom that attracted the greedy and the ultra-greedy.
This situation has been caused by growth slowdown in China, which has upset the ever neurotic world markets, and is probably an over-reaction.
Shares down – upward pressure on bonds
When markets are in an upset, the flighty money, the traders and the nervous nellies will cash in their shares and look for safe havens – cash and bonds. However they can’t stay there long since cash in most countries only pay 0% to 1% and bonds 2% to 3% (a tad more in NZ).
They will be looking at re-entering the share market before too long, seeking a better return (as always). Remember emotions affect markets, so they overshoot upwards on greed, and downwards on fear, but soon find fair value again.
Indeed who has been selling their shares? Is it the nervous nellies selling? And are the professionals like DFA, the canny, and the disciplined, out there buying shares?
According to Harbour Asset Management, shares now appear attractively priced when compared with bond and cash rates.
The NZ $ has an effect too as portfolios were boosted earlier this year, and then more recently cushioned, by the falling NZ$.
The best strategy
· Ensure you hold a well-diversified portfolio of quality asset
· Don’t buy on euphoria, or sell on bad news
· Use disciplined rebalancing i.e. taking profits on rising markets (selling at higher prices)
· Rebalance if markets are falling (buying more shares when they are cheaper)
· Remember there is no free ride
· You can’t get more than a bank will pay without a price, and that price is volatility
· The media is the investor’s nemesis, so don’t react to it
· It might all be different again by the end of next week
Next week – back to investments you can trust part 6.
Supplied by Alan Clarke, financial & retirement adviser, & author.
His 2nd book “The Great NZ Work, Money & Retirement Puzzle” is now available.
Alan is an independent authorised financial adviser (AFA) FSP26532.
His disclosure statement is available on request and free of charge.