While much of the world frets over the future of China and Greece, it is a good time to step back and look at how this might (or might not) affect your portfolio. We don’t pretend to be able to predict how events will unfold in these two areas, but we can keep your portfolio risks measured and reasonable regardless of what happens.
Greece has become the poster child for Europe’s failed push for austerity. It may withdraw from the Eurozone altogether, or it may be extended another rescue package from the International Monetary Fund, European Central Bank and European Union. Whatever happens, it is important to realize that Greece represents only about 2% of the European economy. In other words, the Greek economy would have to decline by more than 50% to push the Eurozone into recession. Furthermore, the risks of contagion to other European nations like Italy, Spain and Portugal has largely abated since the large European banks have had several years to reduce their exposure to Greek debt. The events in Greece are therefore largely contained within Greece. As for PWL clients’ exposure to the Greek stock market, it is less than one hundredth of a percent, and therefore entirely negligible.
Recently, China has become the favored topic of many pundits, as the Chinese stock market has experienced some significant volatility in the last few months. Following a 60% rise from January 1st to June 12th, the Shanghai Stock Exchange has declined to a level only 15% above where it started the year. The pundits choose to focus on the recent drop, instead of considering a longer term view, because a headline that screams of a market plunge is far more eye catching to readers.
Taking a much longer term view, the Chinese stock market is maturing alongside the maturing Chinese economy. More Chinese are attaining middle class status, and therefore investing in the stock market. More international investors are entering the Chinese markets as the previously unavailable China A shares become open to them. Along this path to maturity, there will be growing pains, which the events of the last few months demonstrate. For PWL clients, we have always maintained a cautious approach to emerging markets and China represents no more than 1% to 3% of our portfolios.
We clearly have no control over the events in China or Greece. However, we can control your portfolio’s exposure to these markets, ensuring that you hold enough to gain when they are doing well, but not so much that their challenging times will ever threaten your lifestyle.