Don’t let China disrupt your market outlook

With Chinese stocks sliding, the global market outlook is jittery. Our advice? As the 1939 British motivational poster advised prior to World War II:  “Keep calm and carry on.”

There are fears that China’s economy “is in deep trouble”. But we agree with The Economist that the fears are overdone. So if panicky investors dump high-quality, dividend-paying shares at ridiculously low prices, our advice is to keep on buying.

The worldwide stock market setback has largely reflected worries about China. The Economist writes that there’s fear “that China’s economy is in deep trouble”.

A superficial glance at China’s current situation could lead to the conclusion that its economy is troubled. After all, China’s stock market is down sharply since June and its exports are declining.

However, stock market setbacks are unreliable indicators of recessions. Consider the crash in the autumn of 1987, in which stocks plummeted 23 per cent in a single day. During that crash and the subsequent three years, the economy continued to grow. So China’s stock market setback does not necessarily mean that its market outlook calls for a recession. Stock market advances, by contrast, are reliable indicators of economic recoveries.

The Economist sees other reasons why China should avoid a recession. For one thing, relatively few of China’s citizens own stocks. So the stock market setback will have a relatively mild impact on the overall population. Given the Chinese government’s overly-strenuous attempts to stop the stock market’s slide, we suspect that many top government officials have significant stock holdings. But most Chinese have little at risk.

Property matters more than stocks

The property market outlook is far more important to most Chinese. The Economist notes that property accounts for about 25 per cent of China’s GDP. (Gross Domestic Product, or “GDP,” is the value of all goods and services produced by the economy). The Economist writes, “In the past few months [property] prices and transactions have both been healthier.”

China wants to consume more and lessen the economy’s dependence on exports. So the slowdown in exports is partly a result of this reorientation of the economy. What’s more, with the world’s second-largest economy, China can no longer count on exports to fuel its former double-digit economic growth.

Remember, too, that as China’s economy expands and catches up with advanced economies, its growth rate is bound to slow. The Economist writes: “The economy is slowing, but even five per cent growth this year, the low end of reasonable estimates, would add more to world output than the 14 per cent expansion China posted in 2007.”

Beijing can ease monetary and fiscal policies

China’s one-year interest rate is 4.6 per cent, according to The Economist. As a result, the central bank could reduce interest rates and adopt an expansive monetary policy.

China also holds trillions of U.S. dollars—the largest stash of any country outside of the United States. This gives it the scope to use fiscal policy to stimulate the economy. China needs more infrastructure, such as airports and highways.

In short, China is likely to avoid a recession in the near term. All the same, jitters could prompt many investors to sell. If U.S. and Canadian markets fall, you should use the opportunity to buy high-quality, dividend-paying stocks at attractive prices. 

 

The MoneyLetter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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