By Frank Newman on 22nd August 2015
It’s been a tough week internationally and these are nervous times for those with their life savings in the share market. The main problem is China.
Last month I wrote share prices had collapsed 30% in a matter of weeks and the Chinese authorities had imposed a raft of regulations to restrict supply, and poured in billions of dollars to boost demand for shares. It had an immediate effect but prices are now back where they were last month and threatening to go lower. The problem for the Chinese government is that while they are putting bucket-loads of money into the share market to support prices, high net worth individuals and foreigners are reducing risk by taking it out.
The international media commentary on the outlook for China is becoming increasingly negative, and with good reason. The inescapable fact is most of the companies listed on the Shanghai stock exchange will report lower earnings in 2015 and share prices are still more than 60 times last years earnings, which is absurdly high. Such high price to earnings multiples can only be sustained by a company or market when the growth outlook for future earnings is highly positive. That is no longer the case in China. A more sensible multiple in their current economic climate is about 25 times earnings, which means share prices still have a long way to fall before being anywhere near reasonable.
The ‘smart’ money knows this, so it is getting out. The ‘dumb’ money – government money motivated by politics rather than economic reality – is putting money in.
There is now a prevailing view that China’s economic down-turn will be deeper than has been forecast. This has implications for those exporting to China, including New Zealand.
Elsewhere in the world Greece remains a problem – their unstable political system makes any sort of long-term economic strategy impossible. Last week Greece’s Prime Minister resigned after less than a year in office, so next month it is having yet another election. This follows disunity within the PM’s party, a third of whom have left to form a new anti-austerity party. While the PM is hoping to be re-elected with a more unified caucus, the disruption simply confirms the political improbability of Greece carrying out an austerity plan for any length of time.
The reality that European leaders are not admitting to their voters that Greece will never be in a position to fully repay its mountainous debt – the numbers simply do not add up. A substantial portion will need to be written off, which will in effect be a subsidy to Greece paid for by the rest of Europe. It really does show how flawed the EU’s centralised system of government is, and why it will eventually fail.
These global uncertainties are causing nervousness on the international share markets. Last week prices fell sharply and in the US the Dow Jones index is now 10% off its peak and officially in a “correction”. The probability is that worse is to come.
While there are lots of negatives internationally, there are positives locally. Our lower dollar is good for tourism, which is our second biggest export earner behind dairy.
Here are some of the numbers:
• 3,002,982 visitors came to NZ for the year to July, up 7% on last year.
• 4%, the average annual expected growth rate in tourist numbers through to 2021.
• 15.3% of NZ’s overseas earnings come from tourism.
• 28%, the total increase in international tourist spending last year to $10.3 billion (domestic tourism adds about another $13 billion).
• 43% of tourists come from Australia. China is second with 10% but they are the fastest growing sector with a 30% increase last year.
• 52%, the average occupancy for hotels (up from 50% last year).
• 42%, the average occupancy for motels (40% last year).
• $3,235 is the average expenditure per person per trip (up 19% on last year).
• $2,015 is the median expenditure per person per trip (up 15%).
• 94,100 is the number of people directly employed full-time in the tourism industry, which is 4.7% of total work force. A further 72,700 full-time equivalent workers are indirectly employed in the industry.
In uncertain times it’s quite nice being an island some distance away from other more troubled nations, and a country others are keen to see.