Podcast 10th July 2015
The wild roller coaster ride of China’s equity markets is having a knock on effect on global financial markets. China’s equity indices have fallen by around 30% over the last couple of months and the government is adding to the panic by imposing restrictions on trading and by even urging the central bank to provide support to equities.
Why should China’s equity market roller coaster affect your investments? The equity market rise and fall (equities had risen by over 100% before falling) was largely driven by individual investors rather than institutions and FIIs. Hence FIIs will not exit other markets to make up for losses in China. However, global financial market interlinkages make sure that any big movements in large markets and economies have a knock on effect on all other markets. Let us see how.
Your equity investments could get affected by China’s equity market fall if for example you own equity of a company that has large trade relationships with a Chinese firm that is depending on IPO for funding its business plans. IPO’s have been put on hold by the authorities and the Chinese firm would have to put off its plans leading to your company being affected and its stock price falling.
China is the largest consumer of commodities in the world and if equity market fall affects investment plans leading to fall in demand for commodities, any commodity stocks you own will see fall in value. Chinese banks have been lending to companies globally and if that lending stops, many companies will face difficulties in accessing credit leading to fall in value of these companies.
Even your fixed income investments could be affected by fall in China’s equity markets. Bonds issued by Chinese firms are losing value as investors fear access to further funding could be cut off by fall in equity prices and credit risk aversion amongst lenders. The fall in equity markets have also led to margin calls for leveraged investors who have given bonds as collateral. The margin financier selling the bonds to fund the margin calls is leading to loss in value of the bonds.
Fall in prices of bonds of Chinese issuers have a cascading effect on bond spreads for issuers across other countries. There is a rush towards safe haven treasuries leading to rise in credit spreads of issuers. Hence an Indian issuer for example would see rise in borrowing costs due to the indirect effect of fall in value of bonds of Chinese issuers.
Rising borrowing costs for issuers globally will lead to higher borrowing costs in the domestic market as issuers access the domestic market for funds increasing supply of bonds. FII’s could also sell bonds in the face of rising yields leading to further rise in yields of bonds. Returns on your bond holdings directly or indirectly could fall on rising bond yields.
It is extremely important to understand the global interlinkages of financial markets as it now has a strong impact on your investments.
Attend our Knowledge Workshop on Retirement Investments in a Fast Changing Dynamic World on the 4th of September 2015 at Sofitel BKC Mumbai. Please call Neelima at +919819770641 or log in to investorsareidiots.com to register. Thank you for listening in.