Fears of Greek euro exit and China's stock market crash are panicking global traders: But how vulnerable are UK investors?

  • Cashing in European funds could be a mistake
  • Greek stocks unlikely to be held in a mainstream European fund
  • Now could be the right time to buy while shares are cheap 

By Holly Black For Money Mail

Published: 18:38 EST, 7 July 2015 | Updated: 03:43 EST, 8 July 2015

This is a worrying time if you are an investor. Greece is on the brink of leaving the euro; U.S. interest rates could be hiked; bond markets may collapse; share prices in China are slumping; and the FTSE 100 slipped by almost another 2 per cent yesterday. It’s no wonder many are panicking.

Experts will tell you that if Greece leaves the euro, it will not affect the UK because our stock market has only around 2 per cent exposure to it. They’ll also tell you that it does not particularly matter what is happening in China, as its stock market does not allow in UK investors.

And they will say that an increase in the U.S. interest rate is a sign of how strong its economy is, and that none of it affects the FTSE stock market anyway.

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On the brink: There is concern that, if Greece toppled, it would reveal weak links in the periphery of the continent, such as Spain and Italy, which could cause them to fall next

On the brink: There is concern that, if Greece toppled, it would reveal weak links in the periphery of the continent, such as Spain and Italy, which could cause them to fall next

The trouble is that facts and figures are only a small part of this story. Stock markets are based on supply and demand and, because of this, what happens on them can be dictated by sentiment.

If investors are confident, markets go up, regardless of what the data says. And if they are worried, that’s bad news. So, should you be panicking, too?

WHY MARKETS MAY SHRUG OFF GREEK PANIC

As Greece hovers on the brink of exiting the euro, savers might be tempted to cash in all of their European funds. But this would most likely be a mistake.

First and foremost, you should always consider: what company shares do I own, and will the troubles affect them?

You’re unlikely to have any Greek stocks in a mainstream European investment fund because, in investment terms, Greece is not considered a developed country.

Rather, since 2013, it has been classed as an emerging market, so you are actually more likely to have exposure if you hold an emerging markets fund that also invests in countries such as Turkey, Poland and Russia.

Even still, it is also worth bearing in mind that Greece is a very small country, with a population not much bigger than London, at 11million. Because of this, its stock market is very small, so there are fewer companies for funds to invest in.

And even if you do invest in global companies such as HSBC, which runs offices there, the amount of money at risk is minuscule.

Markets largely shrugged off the poll results from Sunday, but the Greece crisis has prompted many people to speculate whether Europe’s economy might be on the brink of a Lehman Brothers-style collapse.

This was the first bank to crash in the financial crisis. It was considered to be not worth saving because it was a relatively small institution. However, letting it go bust, in 2008, sparked a chain reaction that led to a global financial collapse.

There is concern that, if Greece toppled, it would reveal weak links in the periphery of the continent, such as Spain and Italy, which could cause them to fall next.

However, Tom Elliott, international investment strategist at wealth manager deVere Group, does not think this is likely because the European Central Bank (ECB) still has one important weapon in its armoury it has yet to use: it can buy the struggling country’s own government bonds to prop up its ailing economy.

Mr Elliott says: ‘The ECB would need to move quickly, but the strategy was created when its head, Mario Draghi, said he would do whatever it took to save Europe, so I am assuming he will.’

On top of this, Europe is actually in pretty good shape. Economies are growing, there are no longer fears about deflation and a weak currency is helping exports.

Rather than running for the hills if spooked investors start selling shares, it could actually prove a good time to start buying while things are cheap.

RATE RISES IN U.S. MAY BE THE REAL THREAT

Rate rise: The U.S. is set to be the first Western economy to increase interest rates since the crisis began

Rate rise: The U.S. is set to be the first Western economy to increase interest rates since the crisis began

While Greece is grabbing all the headlines, some economists fear this may just be a sideshow, distracting everyone from the real problem about to hit the global economy.

Later this year, the U.S. is set to be the first Western economy to increase interest rates since the financial crisis began. Expectations are that this could happen as early as September.

While some think a rise in rates will happen slowly and carefully, others believe that the U.S. is so desperate to increase them, it will go too fast and plunge this powerhouse economy back into recession.

Data suggests that the U.S. economy is strong, as wages are rising quickly, unemployment is falling and the consumer market is doing well, and so its stock market should be unshaken by a rate rise (generally, when interest rates rise, investors put less money into shares). But because it will be the first country to raise interest rates, there are some jitters around the reaction of investors.

When the prospect was mentioned — along with the idea that its version of quantitative easing may be stopped — in 2013, the market panicked and the Dow Jones stock market fell nearly 5 per cent in a day. Things have changed since then. Juliet Schooling Latter, investment analyst at fund broker Chelsea Financial Services, says: ‘The trouble is that markets are so global now that we have to be wary of a rate rise causing problems elsewhere in the world.

‘If the U.S. does manage to raise rates without the world coming to an end, then there will be a collective sigh of relief that things could slowly start getting back to normal.’

The message to investors is to sit tight, but stay alert. What happens in the U.S. will affect everyone and will be a sign of what the future holds.

THE SAFE HAVEN THAT COULD YET COLLAPSE

High-yield bonds: They are risky because of the high possibility that the company or country you take the bond from will fail to pay you the interest it promises

High-yield bonds: They are risky because of the high possibility that the company or country you take the bond from will fail to pay you the interest it promises

Savers piled into bonds after the financial crisis as a safe investment. Initially, money flooded into the safest type - UK government bonds known as gilts. As these soared in popularity, the interest rates they paid plummeted.

As a result, cash began moving into riskier types of bonds - the government bonds of strong countries such as Germany and the U.S., and bonds issued by major blue-chip firms known as corporate bonds. Again, the rates plummeted. So investors took on an even riskier debt in the form of so-called high-yield bonds.

These paid an attractive rate of return as they are really junk bonds - the debt of less creditworthy countries and companies.

They are risky because of the high possibility that the company or country you take the bond from will fail to pay you the interest it promises.

The bond market has been sitting on a precipice for a while now. Rates are miserly, but savers are so desperate for the stability these bonds offer that they are actually losing money by investing in them.

At one point, a ten-year German Bund paid interest as low as 0.07 per cent. After inflation, this meant you were out of pocket.

According to analyst Fund Expert, a number of European government bonds currently have an actual negative yield. This means investors such as pension funds actually have to pay to keep their money invested in the fund.

They are happy to do this as long as it is perceived to be decent value and their money is safe. But if governments start hiking their interest rates, then their bonds begin to look very poor value and there could be a rush to sell.

According to Fund Expert, when savers tried to sell bank bonds in 2008, and no one wanted to buy them, prices plummeted by up to 50 per cent.

Selling all your bonds tomorrow is a bit drastic. Brian Dennehy, director at Fund Expert, says: ‘Interest rates will only go up very gradually over years - the economic risks are too great to do otherwise.

‘Meanwhile, there’s still a lot of money being printed elsewhere - for example, the Japanese government has its own quantitive easing programme to try to kick-start growth - which should buy any decent bonds on offer.’

Also, if you are invested in corporate bond funds, some will be able to take advantage of falling prices by using it as an opportunity to buy up cheap bonds.

FEARS OF A SELL-OFF OF CHINESE SHARES

Economic slowdown: But the long-term growth prospects of China still look good

Economic slowdown: But the long-term growth prospects of China still look good

Meanwhile, in China, the stock market has experienced its worst rout in more than 20 years. Some £2trillion has been wiped off the values of firms and 900 companies have suspended trading.

A crackdown on corruption by the government has had an odd effect on its stock market.

High fliers who would once take big punts in casinos have been forced to move elsewhere, and so instead are dipping into the stock market as a way to make a bet. However, these are not professional investors and, as a result, they get jittery very easily.

The first rule of investing is that it is for the long term - but these punters do not realise that.

The gamblers are pulling millions out to cash in on the smallest swings in the market. This is causing volatile swings in the Chinese stock market of up to 8 per cent a day.

Experts fear that this could spread into a sell-off in such commodities as steel and iron, which would be further bad news for export-led China. While that sounds pretty scary for any savers with a China fund, it is not as bad as it seems.

Hargreaves DIY investing

The Chinese stock market - the Shanghai Composite - is notoriously closed to international investors. Instead, if you hold a China fund, you will most likely be invested through the Hong Kong stock market, which is less volatile and the companies of which have much better corporate governance.

Although there will be an indirect effect on the shares on this market, it is not nearly as intense as being on the Shanghai Composite.

On top of that, few savers are likely to hold a pure China fund. It is far more likely that you own a fund that spreads its money either across Asia, or across a number of emerging market countries, which dilutes your risk even further.

But, says Tom Elliott of deVere Group, savers are focusing on the wrong thing: ‘People should not be concentrating on what the stock market is doing because they don’t have access to it.

‘What you need to pay attention to is if the Chinese economy really starts slowing down, because that could have a huge knock-on effect on the global economy.’

The Chinese government is reducing interest rates to encourage more money out of savings and into the stock markets. But, if it lowers them too much, there could be problems.

If interest rates fall, this could encourage companies and consumers to borrow more and banks to lend recklessly. The problem is that they may be borrowing for projects they cannot pay back.

For example, a building boom has seen a string of ghost towns spring up - uninhabited estates with no infrastructure in or out.

If firms cannot sell their developments, they cannot repay their bank loans and a banking crisis could follow. So should savers panic? Not yet. The long-term growth prospects of China still look good.

An economy of its scale growing up 6 or 7 per cent today is more important than when it was half the size but growing at 9 per cent ten years ago.

Plus, China is moving away from being reliant on its exports and shifting towards becoming a more consumer-led economy.

If you have the stomach for some ups and downs and are willing to invest for at least five years, spread your risk by investing in an Asia fund rather than just one country. 

 

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