Our View on Greece and China
These past weeks have seen tumultuous events throughout global markets. Greece and China in particular have grabbed headlines and warrant commentary.
First, the ultimate outcome in Greece is impossible to predict, but either way we believe the direct impact from a Greece default and/or exit from the euro would be manageable. European and U.S. banks have substantially reduced their loans to Greece in the last few years and the current exposure is relatively low. In terms of size, the Greek economy is similar to the state of Connecticut or the city of Detroit (which defaulted and ultimately filed for bankruptcy in 2013). The only real risk is if the Greek situation spreads to other periphery countries like Italy and Spain. At this point, that risk appears low – Italy and Spain government bond yields are around 2.3%, comparable to the U.S. We have no direct exposure to Greece in our portfolios and none of our companies have significant exposure to Greece indirectly.
Meanwhile, Chinese stocks have risen dramatically over the last year, so the recent correction is not surprising. Even after the correction, both the Shanghai and Shenzhen Composites are up over 100% in the last 12 months. We believe that the market in China is being driven mainly by speculation from mostly retail investors. Margin debt and new retail account openings have exploded in recent months. The shares of many companies have risen dramatically after merely changing their name. While the headline P/E often cited does not appear high, it is skewed by large holdings in Chinese banks and state-owned enterprises which trade at (deservedly) very low multiples. The average P/E ratio on the Shenzhen Stock Exchange is 54.3. In short, there are several signs the Chinese market is in bubble territory.
As a result of this concern, we don’t own any Chinese A-shares. We do own companies listed in Hong Kong and the U.S. that have exposure to the Chinese economy (where not much has changed). The stocks we own have not had the dramatic rise seen in mainland shares, so we don’t think they will suffer a dramatic fall if Chinese markets continue to decline.