Should Investors Be More Worried About Greece or China?

MARKET REACTION: As Brussels prepares to release much-needed cash to Greece followed a resolution, should investors stop worrying about the eurozone? And what about China?

Emma Wall 16 July, 2015 | 11:08AM
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This article is part of the Morningstar's Guide to Emerging Market Investing. Click here to find out just what an emerging market is and which regions hold the potential to boost your investment portfolio. 





Emma Wall: Hello and welcome to the Morningstar series, Market Reaction. I am Emma Wall and I am joined today by Anna Stupnytska, Global Economist for Fidelity.

Hi, Anna.

Anna Stupnytska: Hello.

Wall: So, we're here today to talk about two of the biggest themes of the week, in fact, the year Greece and China, let's start with Greece because we've had some form of resolution last night. Does this mean we can stop worrying about Greece?

Stupnytska: I think at this point in time we can stop worrying about Greece. We know that some deal is in place and yes, there is a lot of uncertainty around further negotiations and of course, around the implementation of the reform from the Greek side. But I think as far as the markets are concerned as far as investors are concerned, we should really start focusing on fundamentals rather than the politics.

Wall: So, the fundamentals of the Eurozone, are they supportive for growth, supportive for stock markets?

Stupnytska: They are supportive and interestingly, they were not impacted that much by the uncertainty around Greece. Obviously, we have the ECB support, so we haven't seen any contention in financial markets and the macro fundamentals are looking better and better. So I think the recovery is still intact and that should support European equities through the year.

Wall: So, good news about Greece. What then about China? Should we be worried about China?

Stupnytska: Well, obviously, Greece is very small, it's 2% of the euro area GDP and it's 0.2% of the global GDP. China is about 15% of the global GDP and actually, it contributes around a third to global growth these days. So, that's a much bigger worry and I would worry about a hard landing in China. But we're not seeing signs of that yet, despite the burst of the equity market bubble over the past month, I don't think we will see significant impact on the real economy. But that's something that we should watch.

Wall: And if there is a significant impact on the real economy, we've had a significant bear market in China. Some people are saying there is a further 20% to go. If on top of that, we have growth sharply slowing down, should then – what are the implications then?

Stupnytska: Well, China is very connected to the rest of the world via trade and also via financial markets. So the spillovers will be significant. We should worry about emerging markets in particular that are so much linked into the China investment cycle and the China consumption cycle, even some of the developed markets are obviously linked to that. So that would be a big worry.

But so far as I said, there are no signs of that and what's encouraging is that the government has introduced a lot of easing measures over the past few months and actually are looking at the June data. It seems like these measures are working. Growth is stabilizing. I don't think we should expect huge acceleration in growth momentum, but we should expect some stabilization over the next few months and that's an encouraging sign.

Wall: So watch this space really.

Stupnytska: Exactly.

Wall: Anna, thank you very much.

Stupnytska: Well, thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching. 

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Emma Wall  is former Senior International Editor for Morningstar

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