Shift in power: Asia taking over market influence and trade

^{David Robertson, Head of Economic and Market Research at Bendigo and Adelaide Bank
June 2018}

The phrase ‘When the US sneezes, Australia catches a cold’ has been a common line in the financial press over the years, especially when trying to explain market movements; and there always seemed some logic to this adage.

The US remains the largest economy in the world so is globally highly influential, and specifically our countries have economic, political and cultural links including significant US investment in Australia. The first thing we seem to consider when looking at a new day’s trading for our stock market is what the Nasdaq, the Dow Jones or the S&P 500 Index did the night before.

In reality, our stock market is increasingly correlated to Chinese and East Asian markets.

This makes sense given the US stock market is dominated by Tech Stocks, which make up the lion’s share of the NASDAQ and around 25% of the S&P 500, unlike our ASX 200.

Meanwhile Australia’s major trading partners are very different today to ten years ago - no surprise that China and Japan dominates trade, and that we are increasingly doing less with the US and the European Union. Other East Asian countries are well represented here, and it seems reasonable to expect this trend to continue, as most Asian economies continue to grow more quickly than elsewhere.

A recent Reserve Bank speech on the economic relationship between China and Australia spoke at length on the depth of our relationship, beyond just Iron Ore and Coal exports, noting a sharp rise in service exports - especially tourism and education.

The message from the RBA was clear - our economy (and markets) have benefitted from Chinese growth, especially since China joined the WTO in 2001: but the risks in the Chinese financial system are ever increasing. These risks include:

• A sharp increase in Non-financial Sector Debt (refer chart below) which excludes borrowings of Chinese banks themselves, as opposed to how much they have lent;
• A similarly alarming rise in Household Debt - China had almost no mortgages prior to the new millennium;
• Growth in the ‘shadow banking’ system, i.e. lending extended beyond the formal banking system (green in below chart):

The Chinese authorities are well aware of these risks and are taking action - however history suggests that the path of financial reform can be a very difficult one, especially after an explosion in debt. Australia (and in particular the RBA) are watching developments closely- and our stock market may continue to take its lead increasingly from China and East Asia rather than from its old friend, the USA - with or without a cold.

For information on how your clients can utilise a margin loan account to gear their views, please contact your Relationship Manager or call Leveraged on 1300 307 807.

^{Issued by Leveraged Equities Limited (ABN 26 051 629 282 AFSL 360118) as Lender and as a subsidiary of Bendigo and Adelaide Bank Limited (ABN 11 068 049 178 AFSL 237879). This information is correct as at 27.06.18 and is for general information purposes only. It is intended for AFS Licence Holders or authorised representatives of AFS Licence Holders only. It is not to be distributed or provided to any other person.}