Fears for China’s Economy

There are concerns for China’s economic growth given the potential collapse of one of its largest property developers, Evergrande. Speculators are suggesting that if Evergrande fails, this could result in the Australian share market crashing, which I strongly disagree with.

Right now, everything we hear is either about COVID or China and how this will affect not only our share market but the economy. Despite the current situation with COVID still being very fluid, there is light at the end of the tunnel and the Australian economy is coping. The good news is that the government knows, based on what unfolded in 2020 that it can restart the economy pretty quickly if it needs too. The challenge with this, however, is China and how they respond to the current tensions between our two countries.

GDP growth in China, Australia and the US

We know that China’s economy is growing given that its GDP growth in the third quarter of this year was 7.9 per cent, which is on the back of record growth of 18.30 per cent in the second quarter. In fact, if we look at the last 12 quarters since 2018, 11 were positive. If we exclude the record second quarter growth this year, the average growth in the remaining ten positive quarters was 5.97 per cent, which is above both Australia and the US over the same time. Australia’s GDP growth in the second quarter of this year rose by 9.6 per cent while the US achieved GDP growth of 6.6 per cent.

Given the current economic climate, the probability of the market crashing is low, therefore, I recommend those who have a longer-term view continue to hold rather than sell. If you are more of a short term investor, you may have already sold or you are looking to exit with a view to re-entering the market once it settles.

What were the best and worst performing sectors last week?

The best performing sectors included Energy up 4.90 percent followed by Utilities up 3.82 per cent and Communication Services up 1.22 per cent. The worst performing sectors included Materials down 2.65 per cent followed by Industrials down 1.37 per cent and Financials down 1.35 per cent.

The best performers in the ASX/S&P top 100 stocks included AusNet Services up 28.79 per cent after a takeover bid from Canada’s Brookfield followed by AGL up 8.15 per cent and REA Group up 7.70 per cent. The worst performing stocks included Lynas Rare Earths down 8.22 per cent followed by Reece down 7.76 per cent and Reliance Worldwide down 5.98 per cent.

What's next for the Australian share market?

With the bearish news about China and how this will negatively impact the Australian stock market, you would think our market would be falling heavily. Yet it held up quite well last week, which is not surprising, as often the big end of town use the news to make profits for themselves and do the opposite of what you might expect, which is to buy rather than sell.

After being down around 3 per cent earlier in the week, the Australian stock market bounced back strongly to be just in the red, closing the week up just 0.70 per cent down. While this is a good sign, I am not getting excited just yet.

My opinion as to the direction of the Australian market has not changed, it will stay bearish in the short term until it confirms otherwise. Earlier last week, the All Ordinaries Index achieved its lowest low in 12 weeks with the market down over 5 per cent since its all-time high in August. While we are in the timeframe for the low I am expecting, I do not believe the market has fallen enough in price to confirm the low. Given this I expect the low to occur sometime in the next month with the market likely to fall below 7,200 points. Remember, you shouldn’t make decisions based on news and speculation, as such I don’t recommend investors panic and sell their stocks, instead they should get ready to buy in November.

For now, good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.