The major stock markets are down around the world, having dropped over the past few months with the losses intensifying over the past few weeks. Global concerns around Greece started the negative trend followed by the sharp decline in the Chinese stock market triggering a steep sell off . The TSX now sits where it did at the start of 2014 wiping out all gains over the past 18 months with the exception of dividends. In these times of market fear, we examine the major risks facing global and Canadian growth, with a focus on the future of corporate profits.
Greece and Europe
Over the late spring and early summer Greece became the hot topic around the world as they once again needed a bailout from their European partners. To make matters worse the people and government of Greece have made it clear that there is not a lot of political will for continued austerity measures. Greece in itself is not a large issue, but represents the worries that other nations, heading down this same path, may soon need similar aide. At the 11th hour Greece and its creditors once again came to terms with a bailout package and austerity measures that has taken away the short term worries, but done little to help the longer term structural issues of many southern European nations. It should also be noted that many of the northern European economies actually stand to benefit from the fear that Greece has caused , as a lower Euro makes their exports more globally competitive. For now crises has been averted but expect this to be an issue that pops up every few years.
China has been the powerhouse of global growth since 2000. Although China’s GDP continues to tick along at an enviable growth rate, they have made headlines lately for a huge drop in their Stock markets. The Shanghai Index started the year at around 3300 points, rose in June to about 5200 points then came crashing back down to 3500 points (basically flat for 2015 and started 2014 at 2000 points). China relaxed rules on leverage (buying with borrowed money) and the middle class looked to their stock market as an investment option. Investors in China pilled in for the first half of the year which pushed markets up unnaturally quickly and as things started to turn the stampede was for the exits, which created a very sharp and quick bubble. The Chinese government is now stepping in to lower their currency and restrict the selling of stocks in certain circumstances. Although this has been a largely domestic Chinese problem, the concerns are around their demand for goods, lowers leading to even lower resources price globally.
The largest issue for the Canadian economy is the low price of Oil. Oil and gas company shares have come down 42% in the past year as measured by the S&P/TSX Capped Energy Index. Instead, they continued to slide, now under $45 a barrel. This obviously hurts profits on the large oil producers but what is less clear is the impact these lower prices will have on other sectors like Banking, Insurance, Railways and other key Canadian Industries. So far profits in these industries have held up, but as spending in the Oil and Gas sector declines, there starts to be bankruptcies in the Oil patch that will no doubt hurt the bottom line of most industries. Stabilization of the price of the barrel will be required before we can really tell how deep the effect to our economy is. We feel oil prices will move back up, but it is hard to tell how long that will take at this time.
What moves the market the most in the short term is sentiment of investors. If there are more sellers on the markets than buyers, prices will drop and if there are more buyers, then prices tend to go up. As negative global events take place more sell orders go in and prices start to drop. As prices drop people panic and sell their stock and it becomes a self-fulfilling prophecy. We all remember the heavy drops of 2008 and with technology; people can trade in real time which of course increases short term volatility. The economic concerns we have listed above are nowhere near the scale of the issues we were facing in 2008, so we do not expect this drop to be as sharp or as long.
What to do?
Take a look at your portfolio to see what is in there, what assets classes are you heavily invested in? It is times like this that we remember why asset classes like Cash, GICs Bonds, Preferred Shares and Mortgage Investment Corporations are an important part of the asset mix.
Wealth Manager, Integral Wealth Securities Limited
Ph. 250 753 1124
The information contained within this report is for information purposes only and should not be construed as an offer to sell or the solicitation of an offer to buy securities. The information found in this report is based upon various sources and is believed to be reliable but its accuracy or completeness is not guaranteed. In providing this report, Integral Wealth Securities Limited, its directors, officers and employees may, from time to time, buy, sell or hold a position in the security mentioned herein