How economic problems in Greece, China could affect you
The economic problems in Greece and China may seem very distant, but their financial situation could have an effect on the US economy.
It's virtually impossible to watch the news without hearing about China or Greece.
With Greece on the constant brink of defaulting its debt payments and China's stock market losing almost 40% of its value, you may be wondering, "Is this going to affect me or my finances?"
Here are the five ways Greece and China's economic problems might impact you.
1. Professional Investors Betting on a Greek Stock Bounceback
According to data from Athens Exchange Group, foreign investors own own close to 60% of the Greek stock market. The same data reveals that U.S. investors hold the lion's share (25%), which amounts to $5.7 billion.
Despite the downward trend of the Greek stock market, U.S. investors continue to pour money into Greek holdings, such as the Global X FTSE Greece 20 ETF (NYSE:GREK). And even though the price of this ETF dropped from a high of $23 in June 2014 to a bottom of $9.90 in July 2015, the ETF's total assets have increased from $245 million to $304 million over the same period.
Unless you've got an unusually high risk tolerance, investing in Greek stock is probably best avoided for the time being. Ditto for China, which is likely to experience continued volatility in the short-to-medium term.
2. Average Investors' "Sleeping Point" Put to the Test
While the investing pros may be betting on the Greek stock market to bounce, the rest of us may be losing some sleep about the ups and downs of our 401(k) balances. (See also: 5 Simple Ways to Boost an Underperforming 401(k))
When Greece appeared likely to default on its debt payment on Tuesday, June 30th, the Dow Jones industrial average plunged by 350 points the day before. Even though American financial institutions have improved mechanisms to shield themselves from foreign externalities, the global financial system continues to be highly interconnected.
This is why many U.S. investors may be reaching their sleeping point — taking only the risk that still allows them to sleep at night — and decide to sell part of their stocks or switch holdings to alternative financial vehicles, such as bonds.
In these times of financial turmoil is important to remember this pearl of financial wisdom from Alan Greenspan: "The market pays a premium to those willing to endure the angst of watching their net worth fluctuate beyond what Wall Streeters call the 'sleeping point.'" Before jumping the gun on Greek or Chinese stocks, consult your financial advisor or 401(k) plan manager to make an informed and non-emotional decision.
3. U.S. Dollar Becomes Stronger
The mid-June 2015 crash of the Shanghai stock market was huge. The world's third largest stock exchange by company value, the Shanghai Stock Exchange Composite Index went down by more 20% during the second half of June.
There was such a selling frenzy of Chinese stocks that China's 21 major securities brokers had to mutually agree on not selling Chinese stocks as long as the Shanghai Composite is below 4,500 points (it's currently trading at about 3,990 points).
The Chinese stock market crisis has contributed to the strengthening of the U.S. dollar as more and more Chinese investors are seeking refuge in U.S. assets, including stocks, treasuries, or just plain cash. Tack on Greece's economic problems, and you get an U.S. dollar gaining 3% in value against global currencies.
In theory, a stronger U.S. dollar sounds awesome. However, the reality is a bit more complicated. It can make exports more expensive, hurting returns for American companies, for example.
4. Chinese Investors Are Inflating U.S. Real Estate Prices
One thing that Chinese investors are buying a lot: U.S. real estate. That may be in part because of the unstable economic reality of their home country.
According to the National Association of Realtors (NAR), in 2014 Chinese buyers spent an estimated $22 billion on American real estate. Even more surprising, 76% of those purchases were made in cash. If you think you had to keep the bid for your dream home competitive, well now you have to work extra hard to keep it that way.
Since the NAR indicates that 51% of real estate purchase from Chinese investors took place in California, Washington, and New York, home buyers in those states need to inform themselves about properties that may be attractive for Chinese investors. If you snooze, you lose.
5. Slowdown for Some U.S. Businesses
Chinese consumers contribute about 8% of the revenues for companies in the Standard & Poor's 500. However, the contribution of Chinese consumers to the revenues of some American businesses is much higher.
Take for example, Yum! Brands Inc. (NYSE:YUM) with over 6,800 restaurants in over 1,000 cities — it generates about 18% of its sales from China. Another example: Apple (NASDAQ: AAPL) reported $16.82 billion in sales from China for the first quarter of 2015. This means that the giant from Cupertino made 29% of its global sales just in China.
A shaky Chinese stock market or economy means that those same Chinese consumers may have to cut back on ordering buckets of KFC and buying iPhones. Some U.S. companies are already feeling the burn. The world's largest auto market saw auto sales tumble 2.3% in June year-over-year and this drop has already affected the price target of General Motors stock from $44 to $36.
So, don't be surprised if some of your U.S. stocks take a dip, or if your employer downgrades sales projections, or starts looking at ways to cut costs. What happens across the globe can impact us, too.
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