Chinese chaos worse than Greece

WHILE the world worries about Greece, there’s an even bigger problem closer to home: China.

A stock market crash there has seen $3.2 trillion wiped from the value of Chinese shares in just three weeks, triggering an emergency response from the government and warnings of “monstrous” public disorder.

And the effects for Australia could be serious, affecting our key commodity exports and sparking the beginning of a period of recession-like conditions.

“State-owned newspapers have used their strongest language yet, telling people ‘not to lose their minds’ and ‘not to bury themselves in horror and anxiety’. [Our] positive measures will take time to produce results,” writes IG Markets.

“If China does not find support today, the disorder could be monstrous.”

In an extraordinary move, the People’s Bank of China has begun lending money to investors to buy shares in the flailing market. The Wall Street Journal reports this “liquidity assistance” will be provided to the regulator-owned China Securities Finance Corp, which will lend the money to brokerages, which will in turn lend to investors.

The dramatic intervention marks the first time funds from the central bank have been directed anywhere other than the banks, signalling serious concern from authorities about the crisis.

At the same time, Chinese authorities are putting a halt to any new stock listings. The market regulator announced on Friday it would limit initial public offerings — which disrupt the rest of the market — in an attempt to curb plunging share prices.

While the exact amount of assistance hasn’t been revealed, the WSJ reports no upper limit has been set.

All short-selling — the practice of betting that stocks will fall — has been banned, and Chinese media has rushed to reassure citizens.

Yesterday, shares in big state companies soared in response to the but many others sank as jittery small investors tried to cut their losses, Associated Press reports. The market benchmark Shanghai Composite closed up 2.4 percent but still was down 27 percent from its June 12 peak.

Experts fear it could turn into a full-blown crash introducing even more uncertainty into global markets as Europe teeters on the edge of a potential eurozone exit by Greece, after Sunday’s controversial referendum.

WHAT DOES IT MEAN FOR AUSTRALIA?

For Australia, the market crash in China is likely to impact earnings on key exports iron ore and coal, further slashing government revenue, while also putting downward pressure on the Australian dollar.

Jordan Eliseo, chief economist with ABC Bullion, said it was important to remember that the amount of wealth Chinese citizens have tied up in the stock market is relatively minor compared with western investors.

Stocks only make up about 8 per cent of household wealth in China, compared with around 20 per cent in developed nations.

“The market crash there is generating headlines, but it’s not going to have the same impact as a comparable crash would in a developed market,” he said.

“What it means for Australia, though, is it’s very clear there are some serious imbalances in the Chinese economy, and the rate of growth they’ve enjoyed in the past is over. There’s no question our export earnings are going to take another hit.”

Mr Eliseo predicts Australia is likely to experience “recession-like” conditions such as negative wage growth for many years to come. “I believe that’s going to be the new norm,” he said.

WHAT ARE THEY DOING ABOUT IT?

On Saturday, China’s 21 largest brokerage firms announced that they would invest more than $25.35 billion in the country’s stock markets to curb the declines.

The brokers will spend at least 120 billion yuan ($25.75 billion) on so-called “blue chip” exchange traded funds, the Securities Association of China said in a statement after an emergency meeting in Beijing.

On Friday the Shanghai Composite Index closed down 5.77 per cent to end at 3,686.92 points. Since peaking on June 12 Shanghai has dropped nearly 29 per cent, which Bloomberg News said was its biggest three-week fall since November 1992.

The Shanghai market had swelled by 150 per cent in the last 12 months and experts had expected a sharp correction, though the rate at which it has occurred is unnerving many.

Middle-class Chinese investors, encouraged by the government, have been pumping money into the stock market. The WSJ quoted 51-year-old Li Ping, who sold her 7 million yuan ($1.5 million) Beijing apartment to plough 4 million yuan into stocks.

Ms Li said she thought the market would stabilise and rise again. “The fund that I have invested in is very mature and professional,” she said.

CRACKDOWN AS PANIC TRIGGERS ‘SUICIDE’ RUMOURS

Underscoring growing jitters amid the three-week sell-off, police in Beijing detained a man on Sunday for allegedly spreading a rumour online that a person jumped to their death in the city’s financial district due to China’s precarious stock markets.

The 29-year-old man detained was identified by the surname Tian, and is a manager at a technology and science company in Beijing, police said in a post on their official microblog.

Police said Tian’s alleged posting of the rumour took place Friday and called on internet users to obey laws and regulations, not to believe and spread rumours, and to cooperate with police.

The state-run Xinhua news agency reported that Tian allegedly posted the rumours with video clips and screenshots Friday afternoon.

The post, which is said to have gone viral, “provoked emotional responses among stock investors who suffered losses over the past weeks”, Xinhua said.

Xinhua added that a police investigation showed that the video in question had been shot on Friday morning in the eastern Chinese province of Jiangsu where a man had jumped to his death. Local police there were investigating that case, Xinhua said.

The original post was unavailable Sunday on China’s tightly controlled social media, where authorities are quick to delete controversial material.

http://www.news.com.au/finance/economy/chinese-chaos-worse-than-greece/story-fnu2pycd-1227430761673

Save For Super From A Young Age

Most Australians can help their retirement planning without having to find extra money. John Lennon once said that life was what happens when we’re busy making other plans. But sometimes it’s living that puts major plans on the backburner.

Let’s take retirement savings as an example. Most people understand that they’ll need to replace at least 70 per cent of their average earnings in retirement. Most reports show that an average couple needs around $1 million to live comfortably if their plan is to retire for 20 years.

Given the magnitude of this goal, you’d expect a certain focus on retirement savings amongst working people. But a survey conducted by HSBC revealed that 56 per cent of Australians have never saved specifically for retirement outside of super. Another important issue in the findings was that of the 25 to 49-year-olds, the general cost of living, followed by utility bills, mortgage repayments, credit cards and the cost of raising children were among the most important factors. Other issues greater than saving for retirement were medical bills, personal loans, holiday savings, rent, insurance, vehicle finance and renovations. Retirement ranked higher than saving for a wedding. So, retirement savings isn’t really ignored, it’s just that ‘life’ gets in the way.

What most Australians don’t realise is they can help their retirement planning without having to find extra money.

If you’re employed, your employer must put aside 9.25 per cent of your wages into a superannuation fund. So you’re already saving. That’s not the most important part – what you do with this superannuation that makes the difference.

Start by focusing. Tell yourself ‘it’s my money’.

Second, ensure your fund is not charging too much in fees. If you’re paying for an adviser, you should be utilising them more often. I often find when I ask the question ‘When was the last time you saw your adviser’ that the potential client will say ‘I can’t even remember his name’.  Also, make sure you are not paying more than you have to. The difference between 1 per cent and 2 per cent of a $100,000 nest egg is $1,000. This is money you should keep in your own savings where it can compound.

Third, avoid trading-off potential returns in order to have ”risk free” savings. The difference between a ‘conservative’ option in a super fund and a ‘growth’ option can be the difference between earning 4 per cent and 9 per cent. On a $100,000 nest egg, that’s a difference of $5,000 each year. Young people especially should not be too conservative however make sure you understand the risk before you get into any particular investments.

At the same time, avoid chasing the fund with last year’s best performance. You’ll find the best performing funds by looking at how they measure over a three or five-year period.

Finally, make sure your insurance cover is actually covering you when you apply for insurance. Some insurances are expensive and may be unnecessary, others may be cheap, but do not provide you with any benefit if you need it. Saving money on life insurance through your super fund may be an option. For example, if you can save $500 a year in life insurance premiums, that’s more money in your retirement savings.

There is no magic solution with superannuation. Your goals become reality when you start to focus and pay attention. Not everyone can throw more money into their superannuation when life is getting in the way. But anyone can take an interest and make good decisions.

http://womenintheblack.com.au/save-for-super-from-a-young-age/#sthash.MNEQxowL.dpuf

NAB finance chief says profitability will beat capital hikes

NAB chief financial officer Craig Drummond said in the present environment, he would rather have too much capital

National Australia Bank finance boss Craig Drummond says its rivals are catching up fast to the capital high ground it set in May when it raised $5.5 billion, and is convinced NAB can boost its profitability despite the rising capital tide.

“We will be in a peer-leading position on capital but Westpac have done a largish dividend reinvestment plan and they have just raised more capital through sales. Once that’s done they will be up around 9.5 per cent CET 1 ratio,” said Mr Drummond.

He cited Westpac’s sell-off of part of its BT Investment Management fund for about $700 million. This will add up to 0.15 per cent to Westpac’s CET1 ratio. A partially underwritten $2 billion dividend reinvestment plan has already raised it to 9.3 per cent.

Taking into account the capital raising and the partial sell-off of its British assets due in a few months,  NAB will have the highest level of common equity, at more

Several bank analysts are now looking at the minimum tier one common equity level being near the 10 per cent level that NAB has recently set, given that regulators globally want capital to rise.

If the floor on risk-weighted capital held against mortgages was set at the mid-point of the Murray inquiry recommendations – 27.5 per cent up from the average now for the majors of about 18 per cent –Bell Potter analyst TS Lim forecasts the majors would need to raise about $26 billion of equity to get to an overall level of 10 per cent for CET1 capital.

NAB would still need to raise an extra $2 billion extra to meet the mortgage risk weighting requirements, while the other banks would need to raise $8 billion each.

The banks and most analysts agree they are going to have several years to do this, however, and banks are doing it through various means, including DRPs and selling of shares.

A  Westpac spokesman said it would be at the top of its target range of 8.75-9.25 per cent once the BT Funds Management share is sold and the DRP program is complete.

Mr Lim predicts within 18 months Westpac will be just shy of the 10 per cent level due to organic capital generation, with regulator-driven clamps on investor loan growth reducing how much of its capital it can deploy despite a refocusing on other borrowers.

“Westpac will probably get there in about a year,” said Mr Lim. “My forecasts have Westpac at about 9.6 per cent in September then 9.9 per cent a year later.” He said that would be via a combination of recent capital-raising measures and organic capital generation as housing credit growth flattens.

However, he said NAB would probably be higher again by that time for the same reason. But Westpac organically generates more capital than NAB, so the natural growth in that would be slower, point out other analysts.

Some say the major banks need to get to about 10 per cent CET 1 reasonably quickly to be prepared for the changes to capital on mortgages, likely to be announced soon by the Australian Prudential Regulation Authority this year, and then the longer-term Basel 4 global changes to the way capital is calculated

“The world is moving to higher capital ratios,” said one analyst. “Eight [per cent CET1] is not the right number, nine is not the right number. Ten is the new starting line.”

Mr Drummond argues higher capital levels will be a virtue in a period when asset prices have been rising fast at the same time as the outlook for banks has become less certain.

“We and the industry, with our regulator, do regular stress tests. We have been in a period of bull markets of all assets – equity, bonds, property, everything is relatively pricey,” he said.

“I am not predicting [they have peaked] but we have to be thinking about that and the need to deliver satisfactory returns to shareholders and run a strong and robust institution.

“We are not going to buy anything [now] but the world changes quickly – we want to be in a position where we are able to invest heavily if we have to.”

http://www.smh.com.au/business/banking-and-finance/nab-finance-chief-says-profitability-will-beat-capital-hikes-20150622-ghsmwf.html

Financial services sector feels the buzz of disruption

If Australia has been a hotbed of disruption, across all industries, the financial services sector has been the hot water bottle in the hotbed. From the days when the likes of Pepper, Wizard, Aussie Home Loans and Liberty Financial first began to offer alternative sources of home loans to the major banks, through the emergence of alternative payment systems such as PayPal, to the attack by the likes of OzForex and Pepperstone on the banks’ foreign exchange business, to the savaging of the traditional full-service stockbrokers’ lucrative client relationships by online brokers, through to the Australian Securities Exchange itself having its stock-trading monopoly disrupted by the broker-owned Chi-X, the financial services sector has buzzed with the hum of disruption.

Disruption has reached into virtually every area of the industry – and anywhere it has not yet been felt is merely a matter of “watch this space.”

Nothing stands still: the disrupted become disruptors, and vice versa. While fighting Chi-X in one area of its business, the ASX launched the mFund Settlement Service to disrupt the financial advice industry. mFunds allow any consumer to buy and sell managed funds directly on the ASX in the same way and for the same cost as they buy and sell shares, without having to use a financial planner or a platform.

Fresh from snatching a big chunk of the business and retail foreign exchange market, OzForex and Pepperstone now have to deal with the likes of virtual-currency payment systems such as Ripple, which can offer real-time settlement systems for businesses – and do away with the middle-man.

The ASX now conceivably has to deal with disruption in its capital-raising business, too, as crowdfunding – the online fundraising method – graduates from enabling small community ventures to be funded into allowing businesses to aggregate equity funding.

No financial services business can sit on its laurels.

Peer-to-peer lending, financial advice and small-to-medium-sized business banking are just the latest areas to experience the force of disruption, says Martin Smith, head of markets analysis at financial services research firm East & Partners. “The thing about disruption is that it heightens expectations, and anywhere there is potential customer dissatisfaction becomes ripe for disruption. The disruptors recognise where there is dissatisfaction and negative experiences – and being able to provide a product or service that addresses that,” he says.

OPPORTUNITIES OPENED

ME banking has not evolved as quickly as retail banking, he says, but the SMEs’ expectations have. “A lot of businesses see that their business banking is nowhere near as advanced, and they’d like to see that replicated. That opens up opportunities for disruptors.”

Into this breach have stepped businesses like cashflow lenders Moula Business Finance, Prospa and PayPal, which began offering short-term loans to small businesses earlier this year. Perth-based Kikka Capital is poised to enter this market, having licensed the technology of US small business lender, Kabbage.

“These kinds of lenders are lending to businesses based on their cashflow, instead of the old assets and collateral-based approach. This whole move to cashflow lending is quite disruptive to the banks, given that small businesses seeking expansion capital have been required to go to banks, no matter how unhappy they are with the service or the way that business loans are assessed,” says Smith “SMEs weren’t able to get credit anywhere else, but that’s slowly starting to change.”

Robo-advice – where investors simply answer an online survey to determine their risk level, time frame and investment objectives, and the algorithm-driven “robo-adviser” then builds a portfolio for the client – is aimed at both the technology-savvy investors who want to pay a lower fee for financial advice, and the massive proportion (cited to be as high as 80 per cent) of Australian investors who do not get any financial advice, but it may also appeal to investors who have employed a human adviser and regretted it.

“It’s the same pattern we’ve seen in other areas of the industry: where dissatisfaction grows among the customers, disruptors providing a product or service that addresses that is not too far behind,” says Smith.

http://www.afr.com/news/special-reports/age-of-disruption/financial-services-sector-feels-the-buzz-of-disruption-20150615-ghnyb1

The 7 Truths of Investing in a Volatile Stockmarket

Volatility is back. Just as many people were starting to think the stockmarket only ever moves in one direction, the pendulum has swung back the other way. Anxiety is a completely natural response to these events. Acting on those emotions, though, can end up doing us more harm than good.

There are a number of tidy-sounding theories about why markets have suddenly become more volatile. Among the issues frequently splashed across newspaper front pages are global growth fears, policy uncertainty, geopolitical risk and even the Ebola virus.

In many cases, though, these issues are not new. The US Federal Reserve gave notice last year it was contemplating its exit from quantitative easing. Much of Europe has been struggling with sluggish growth or recession for years and there are always geopolitical tensions somewhere.

In some ways, the increase in volatility in recent weeks could be just as much a reflection of the fact that volatility has been very low for some time. Investors in aggregate were satisfied earlier this year with a low price on risk, but now are applying a higher discount rate to risky assets.

So at base, the increase in market volatility is an expression of uncertainty. Markets do not move in one direction. If they did, there would be no return from investing in stocks and bonds. And if volatility remained low forever, there would probably be more reason to worry.

As to what happens next, no-one knows for sure. That is the nature of risk. Investors in the meantime can protect themselves by diversifying broadly across and within asset classes. We have seen the benefit of that in recent weeks as bonds have rallied strongly.

For those still anxious, here are seven simple truths to help you live with volatility:

1. Don’t make presumptions.

   Remember that markets are unpredictable and do not always react the way the experts predict they will. When central banks relaxed monetary policy during the crisis of 2008-09, many analysts warned of an inflation breakout. If anything, the reverse has been the case with central banks fretting about deflation.

2. Someone is buying.

   Quitting the equity market when prices are falling is like running away from a sale. While prices have been discounted to reflect higher risk, that’s another way of saying expected returns are higher. And while the media headlines proclaim that “investors are dumping stocks”, remember someone is buying them. Those people are often the long-term investors.

3. Market timing is hard.

   Recoveries can come just as quickly and just as violently as the prior correction. For instance, in March 2009—when market sentiment was at its worst—the US S&P-500 turned and put in seven consecutive months of gains totalling almost 80 per cent. This is not to predict that a similarly vertically shaped recovery is on the cards every time, but it is a reminder of the dangers for long-term investors of turning paper losses into real ones and paying for the risk without waiting around for the recovery.

4. Never forget the power of diversification.

   While equity markets have turned rocky again, highly-rated government bonds have flourished. This limits the damage to balanced fund investors. So diversification spreads risk and can lessen the bumps in the road.

5. Markets and economies are different things.

   The world economy is forever changing and new forces are replacing old ones. This applies both between and within economies. For instance, falling oil prices can be bad for the energy sector, but good for consumers. New economic forces are emerging as global measures of poverty, education and health improve. A recent OECD study shows how far the world has come in the past 200 years.¹

6. Nothing lasts forever.

   Just as smart investors temper their enthusiasm in booms, they keep a reserve of optimism during busts. And just as loading up on risk when prices are high can leave you exposed to a correction, dumping risk altogether when prices are low means you can miss the turn when it comes. As always in life, moderation is a good policy.

7. Discipline is rewarded.

   The market volatility is worrisome, no doubt. The feelings being generated are completely understandable and familiar to those who have seen this before. But through discipline, diversification and understanding how markets work, the ride can be made bearable. At some point, value re-emerges, risk appetites re-awaken and for those who acknowledged their emotions without acting on them, relief replaces anxiety.

   Written by Jim Parker, Vice President, Dimensional Fund Advisors Ltd

   Image courtesy of Stuart Miles at FreeDigitalPhotos.net