Why Shareholders Should Prepare Themselves for a Difficult End to The Year

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Stock investors are being warned to brace themselves for the worst as we head into the second half of the year. French bank Societe Generale has cautioned that shareholders stand to lose more money as the world struggles with poor growth.

Global growth is expected to continue slowing across both advanced and developing economies. In turn, company profits are likely to remain flat for the rest of the year. The outcome should be felt across international markets as investors search for higher yields elsewhere. At best, investors can expect poor economic growth to place pressure on higher asset prices. At worst, the developing bear market could send markets toward recent lows.

So what should investors be looking out for? Not surprisingly, external shocks are likely to determine the fate of the markets for the rest of the year.

For now, most eyes are centred on the developing situation in Europe.

Investors have nervously watched from the sidelines as events have unfolded in the Eurozone. The uncertainty over Greece’s future in the economic bloc has already sparked massive selloffs across international markets.

The panic reached a crescendo earlier this week when it was announced Greece was heading to a referendum. That should decide the fate of Greece’s ongoing relationship with its creditors. Quite possibly, it will also decide its future in the Eurozone.

So next week promises to be a tumultuous one for investors worldwide.

But one flash point that has caught much less attention by comparison is the one developing in China. As Societe Generale points out, China is a bigger risk to global markets. If it continues its recent slide, it could do damage that will make anything in Greece pale in comparison.

Stock market selloffs are gathering pace

Chinese markets are leading the massive selloffs we’ve seen in recent weeks and months. The Shanghai Composite Index fell by 10% in the space of a week last month. The Shenzhen based ChiNext had a major fall too, losing roughly 30% of its value in the same period. Altogether Chinese markets have seen a $2.6 trillion correction recently.

Globally, things are just as bad.

Societe Generale did some number crunching on the extent of the emerging selloffs. They found that selloffs on MSCI’s World index are increasing. Over 15% of shares on the index lost a fifth of their value from their 2015 peak. What’s more, roughly 42% of MSCI indexed stocks have shaved 10% off their highs. In total the index is down by 4% since its 2015 peak. What’s most concerning is that half of these losses came in June alone.

The worst performer, by region, was MSCI’s Pacific index. It tracks large and mid cap stocks in Asia, including Australia. The index has seen a 46% correction this year. By comparison, the North American index fell 43%, with the European index down 36%.

It’s clear that investors worldwide are heading for the exit. But what’s most concerning is that the pace of these selloffs seems to be accelerating. Investors run when they see uncertainty surrounding the markets. Right now, they’re saying that they feel insecure about their stock assets.

This goes back to the issue of the global economy. With poor growth, investors have little reason to suspect conditions will improve. If economic prospects aren’t improving, then placing faith in stocks becomes riskier. Simply put, if businesses aren’t growing, then neither are their bottom lines, or their share values.

Granted, some companies are emphasising dividend payouts in response to this. But that’s only viable as long as the global economy is stable. As it becomes increasingly rocky, investors will see the folly of such a strategy. Increasing dividend yields doesn’t improve the underlying question of how to achieve real growth.

China versus Greece: The bigger problem?

Societe Generale is right. The global economy is a much bigger problem than anything happening in Greece. Within the realm of international economies, China stands out as the biggest threat to the world. Any prolonged downturn in China will have big repercussions for Australia, and the world at large.

In terms of the sums of money we’re talking about, Greece doesn’t compare. Greek debts are still at a relatively small US$300 billion. The impact of the default, and an eventual Grexit, on markets is limited. The fight to keep them in the Eurozone has as much to do with upholding the EU’s reputation as it does with any economic concerns.

For Aussie investors, a Greek collapse would be even less problematic. The ASX’s exposure to Greek markets is marginal, at best.

Comparing it to the effects of China’s continuing slump would be irresponsible. If China’s economy, and its markets, continues to flounder, it will add to concerns that China is in a permanent decline.

Anything that signals China is undergoing a major correction is a bad sign for Australia. The stock market adjustment is the most recent signal that China will struggle to achieve targeted growth.

Investors are readjusting their investments because the potential for gains is diminishing. Economic conditions aren’t improving, and company profits are flat as a result.

Some will say that this is the correction they had to have. After all, there’s good reason to believe that Chinese stocks are significantly overvalued. But there’s also little doubt that China’s rally since 2011 has finally run its course.

It would be too simple to put the selloffs down to fears over a stock bubble. That only partly explains the situation. Equally important are concerns over the ability for Chinese companies to maintain long term growth rates.

As long China’s economy is slowing, every Aussie investor should be concerned. Declining growth in China affects our most important industries. Export revenues, already down from historic peaks, will only shrink if China’s growth slows further.

The Chinese government will do what it can to prevent this. Already we’ve seen the interest rate lowered four times in six months. The reserve ratio requirement has been lowered for some lenders too. Both measures are attempts to prop up the stock market.

But nothing will save the markets if economic growth remains poor. Unless the world finds ways to achieve growth without credit expansion, then stock markets are on course for a major crash.

Investors have been put on notice.

Mat Spasic,

Contributor, The Daily Reckoning

PS: The turmoil in Greece, alongside China’s stock market hiccup, is bad news for Aussie markets. What’s more, the outcome of both of these issues suggests that the ASX is in line for much bigger losses soon. It’s hard to remain bullish on the future of the local share market when the economic prospects look so poor.

The Daily Reckoning’s Vern Gowdie sees a major correction across the ASX in the future. Vern is the award-winning Founder of the Gowdie Family Wealth advisory service. He’s been ranked as one of Australia’s Top 50 financial planners. He believes we’re set for a catastrophic crash in stocks in the future. And he thinks the ASX could lose as much as 90% of its $1.8 trillion market cap.

Vern wants to help you avoid the coming wealth destruction. That’s why He’s written ‘Five Fatal Stocks You Must Sell Now’. In this free report, he’ll show you which five blue chip Aussie companies could destroy your portfolio — and you almost certainly own one of them. To find out how to download the report, click here.

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The Daily Reckoning
The Daily Reckoning offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, The Daily Reckoning delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, The Daily Reckoning is published in 7 countries with a worldwide readership of almost 1 million people.
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