As China’s property market lost momentum in 2014, retail investors shifted their money to the share market, spurred on by the government.
‘China A shares’ are mainland-based, denominated in yuan and traded primarily by locals on the Shanghai and Shenzhen stock exchanges. A phenomenal rally in China A shares began in July last year, fuelled by many first time retail investors who were gripped by share market fever. More than 40 million new trading accounts were opened in the first five months of 2015 and the value of outstanding margin loans, where brokers lend money to investors to purchase shares, had increased more than fivefold over the previous year to 2.2 trillion yuan (A$473bn).
The Shanghai share market reached a seven year high on 12 June, having gained 152 per cent over the preceding 12 months. Investors expected the People’s Bank of China (PBoC) to provide further stimulus, action to which they had become accustomed through the Beijing engineered rally.
The PBoC failed to act and the market slid 2 per cent. A flood of IPOs hit the market the following day, just as sentiment was beginning to falter. Investors eager to gain a piece of the action sold existing shares and leveraged investors began getting margin calls. Panic set in and the sell-off gained pace. Retail investors account for around 85 per cent of share trading in China, unlike major global share markets which are dominated by professional investment managers, exacerbating the volatility. By 8 July the market had plunged 32 per cent from its recent high.
As the market tumbled, the government started taking steps to attempt to halt the carnage. This began with injections of liquidity and interest rate cuts before escalating to more extreme measures including indefinitely postponing 28 planned IPOs and halting trade in 89 per cent of shares listed in mainland China.
The aggressive approach adopted by the Chinese government appears to be halting the fall. The moves by the government does however raise some questions over the government’s commitment to the liberalisation of capital markets.
Five months of talks between the Greek government and its European creditors broke down as the June quarter drew to a close, with a referendum called to let the Greek voters decide if they were willing to accept the proposed terms for a new bailout. The people of Greece voted ‘No’ to further austerity measures, raising the risk of Greece being unable to repay its debts and possibly being forced to exit the Eurozone. With emergency funding frozen, Greece was forced to close its banks, impose controls on capital leaving the country and set a daily limit of €60 per account on cash withdrawals from ATMs.
At the time of writing, Eurozone leaders were locked in rolling emergency talks over key reforms Greece must enact before further emergency funds will be released to the struggling nation.
While the ongoing issues in Greece are fatiguing for most investors, we believe the contagion from debt default and potential Eurozone exit has diminished. While any form of exit will not be smooth for global markets, Europe is better placed for such a scenario now compared to when Greece first emerged as a problem in 2009.
Eurozone fundamentals continue to show positive signs of recovery, despite headlines being dominated by Greece, as economic data showed continued improvement through the quarter. The size of the Greek economy, 1.8 per cent of overall Eurozone Gross Domestic Product (GDP), ought to be kept in perspective.
The US Federal Reserve appeared to again push out the date for its first interest rate rise against a backdrop of underwhelming US economic data. In the March quarter, GDP growth was 0.60 per cent and the forecast annual GDP growth rate for 2015 was lowered to 1.80-2.00 per cent. Despite the data, Janet Yellen, the Federal Reserve Chairwoman, reiterated her view that the first US interest rate rise was likely to occur before the end of 2015.
The Australian share market, as measured by the S&P/ASX 300, dropped 6.50 per cent over the quarter, bringing the financial year return to 5.60 per cent. The Reserve Bank of Australia (RBA) cut the target cash rate by 0.25 per cent in May, taking the rate to an historic low of 2.00 per cent. The RBA, citing concern over the outlook for global growth and the persistently high level of the Australian dollar indicated that there may be further cuts to come.
The Australian dollar rose from US$0.76 to US$0.81 through the first half of the quarter, as commodity prices recovered from their lows — iron ore gained 39 per cent from its low to reach $65.61 in mid-June. Volatility levels in markets increased globally, as negotiations between Greece and its creditors broke down and the Chinese bull market run stalled. The Australian dollar, along with other risk currencies, sold-off sharply through the second half of June, dropping below US$0.75 during the first week of July.
While the anticipated increase in US interest rates and the slowing of the Chinese economy may exert further downwards pressure on the Australian dollar through the second half of 2015, the fall since the start of the year, over 9 per cent, means that the risk of large declines from this point is far lower. We believe it is prudent to hedge a portion of foreign investment exposure to Australian dollars.
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