Worries over Greece and China Continue - Alaska Permanent Capital Management


Worries over Greece and China Continue

PantagesEquity markets have oscillated over the past few weeks on Greece and China worries.

The S&P 500 closed on Friday at 2,079, which left it flat for the week. Alcoa kicked off earnings season on Wednesday announcing that its second-quarter earnings rose 1.4% YoY. Metal commodities have been hit hard this year owing to the continued slowdown in China. Alcoa’s stock is down 32% year to date. The S&P 500 is up 2.0%.

S&P 500 corporations are expected to post a 4.4% decline in Q2 earnings growth according to S&P Capital IQ. However, if you exclude the energy sector then S&P 500 earnings growth is expected at +3.4%.

The Euro Stoxx 50 index sold off and then rallied later in the week as investors grappled with the Greek vote against austerity. It was up +2.9% for the week at Friday’s close. It’s still 8% below its April highs.

The Greek banks remain closed with the fate of Greece’s participation in the euro and continued default on its debt up in the air. Fortunately bank depositors have 100,000 euro deposit insurance. Oh wait, the guarantor is the Greek government! Never mind.

On Sunday European leaders will review new proposals from Greece for another bail-out program. We are down to the wire. While optimism for a deal is in the air, it’s anyone’s guess as to whether it will be euros or drachmas for Greece in the near future. In any case, we don’t believe it is a systemic event. Think Detroit, not Lehman.

The Chinese equity markets have been on a roller coaster. After having rallied over 100% in the year through May, the Shanghai index (A-shares mainly owned by Chinese citizens) lost 30% from its early June highs. The central government and central bank have been pulling out all the stops to steady the markets; cutting rates, discouraging short selling, easing reserve requirements, putting a halt to IPOs and loosening up margin requirements.

The Economist magazine notes that economic stability is not in peril. The stock market plays a small role in China. Soaring stocks did little to boost consumption and falling stocks shouldn’t hurt it. The significant government interventions to stabilize the market do have a whiff of panic and it does represent backsliding on a commitment to letting free market forces play a “decisive” role in allocating resources as promised by the Communist Party in 2013.

Will this undermine confidence going forward or will investors see that a Xi Jingping put is being offered up on equities? Our guess is the former, but again it’s not a systemic event. China economic growth is still 7%, but on a downward track.

Capital Economics says: Falling equities in China unlikely to trigger a rout elsewhere. A 5% fall in the MSCI Emerging Markets (EM) Index since mid-June has primarily been driven by a 15% slump in the MSCI China Index, which in turn can be attributed to the collapse in share prices on the Chinese mainland. But equities in many of the other countries in the MSCI EM Index have held up much better and we expect this to remain the case even if stocks in China continue to suffer.

APCM’s investment in China is through HK listed Chinese companies (H-shares) that are tracked by the MSCI China index and part of the broadly diversified MSCI EM index. Chinese shares are about 20% of the latter index. They are down about one-half as much as Shanghai over the past month. Many of our balanced accounts have a 5% allocation to EM equities, so perhaps 1% to Chinese equities – not a big allocation at all. Diversification is a good thing. Recall we use a low cost index fund to get this EM exposure.

Given stock market turmoil it was no surprise that a flight to quality in the bond market ensued over the past few weeks. Ten year Treasury bond yields dropped 20 basis points midweek but then gave it all back on Thursday and Friday to end the week at 2.40%, about where they were a week ago!

The IMF has changed its projection for world growth in 2015 to 3.3%, down from a 3.5% estimate in April. It left its 3.8% forecast for world growth in 2016 unchanged. They cite a slowdown in the U.S. economy, which it expects to expand 2.5% this year, down from April’s 3.1% forecast.

On Wednesday the NYSE shut down for 4 hours due to a technical glitch. Not to worry, about 80% of the trading volume for stocks listed on the NYSE actually trades on different venues – not the NYSE trading floor in NYC. So we still got quotes for the S&P, Dow, and all the other indices throughout the day.

Next week should see more clarity with respect to Greece. We’ll watch three key indicators released in the US – retail sales, CPI inflation and housing starts. ISI notes that these three have in total the same influence on capital markets as the payroll employment release by itself.

Finally, for our public sector clients a free Web Seminar: Cybersecurity & Data Breaches: What States, Municipalities, Nonprofits and Others Need to Know July 16, 2015 12 pm ET.

Hope you all had a nice 4th. We had visiting children and grandchildren here. Took the adults to the Whale Fat Follies the other night. Bawdy performance. Be warned!

Jeff Pantages, CFA®
Chief Investment Officer



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