Surviving in an unstable world

Published in the Daily Telegraph, October 2014 by Dale Gillham

China sends a ripple through the Australian market Recent demonstrations in Hong Kong may be giving you flashbacks of the ill-fated prodemocracy demonstration in 1989, and the infamous Tiananmen Square massacre.

You may be asking why I am talking about this, and the answer is that right now we are being bombarded by stories of unrest in the world, and I am being asked how this might impact our market.

As far as China goes, it appears the path taken by the Chinese government is more like what you would expect to see in a democratic country like Australia.

I believe this is a very good sign for financial markets, and we may not actually realise now just how important a sign it is.

Right now Australia is travelling reasonably well considering the impact that the slowdown in China, falling iron ore prices and a lower Australian dollar are having on our miners.

As an economy we are closely tied to China, and cannot assume the unrest in China will not flare up again, or that its economy will expand when Australia needs it to. Therefore we need to be able to look at history. 

In 1989, around the time the Tiananmen Square massacre occurred, markets were less than two years forward of the '87 crash.

Our market was still trying to recover and our financial system was on shaky ground.

When a market correction of this magnitude occurs we often see the market quickly rebound before falling again.

We are six years out from the GFC and our financial system in Australia is on a much stronger footing.

While that doesn't mean a correction won't occur, I believe the worst is behind us.

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