The Sunday Mail (Queensland)

US and China hold key to the immediate future


A WEEK ago it looked as if the world was teetering on the edge of the cliff. Indeed on Monday we stepped over when our market plunged by about $60 billion.

Yet by Friday we had clawed our way back, at least to the edge. All those losses and a bit more had been recovered.

But were we really only back up to the edge, or had we moved more securely up, over and back from it?

Obviously that is quite literally the $64 billion question for investors. For was last week a great “buying” opportunit­y or has the recovery just made for more profitable selling? It looks like a bit of both.

Clearly for those investors prepared to hold shares for the long term, the plunge did open up buying opportunit­ies.

If you want to buy, say, Commonweal­th Bank shares, better to be buying them at $73 as against the $80 and more of a few weeks ago.

But equally, the exact opposite also applied. If you did not want to just ride through the volatility, you get a chance to sell at higher prices.

In terms of the core question – has the “end of the world” been consigned to history, or only been postponed? – for the immediate future, the answer is in the hands of the Chinese government and the US Fed.

Suggestion­s that the Fed would not start raising US interest rates combined with good news on the US economy to send investors back into the market. In China the government and the People’s Bank moved to halt its market slide.

But what is really happening to the Chinese economy? One answer came from BHP Billiton chief Andrew Mackenzie. He said their on-the-ground intelligen­ce told them it was growing at the 7 per cent line-in-the-sand and that the second half was doing better than the first. You could probably trust that more than the official statistics.

But we are really going to find out over the next year how much iron ore they actually buy and at what price.

Far from calming things down, what happened in the US actually introduces a whole new volatility.

Will the Fed blink every time Wall St throws a 1000point temper tantrum? Or is the combinatio­n leading Wall St into an even more devastatin­g trap, when the Fed does raise rates?

For Australian investors this is not a time for panic, but equally you should not assume global markets are now sailing in clear air. Our economy is still poised dangerousl­y between the winding down of the resources boom and a post-boom … what exactly? There are some encouragin­g signs that the lower Aussie dollar is helping non-resources sectors like tourism, education and even manufactur­ing.

Substantiv­e and sweeping reform of all the “usual suspects” like tax, red tape and industrial relations becomes even more urgent.

It’s not just the politics and the politician­s. Some things actually are difficult and conflictin­g. Do we lift the GST and if we do, what do we do with the money?

Do we use it to cut the bud- get deficit? To “fund” personal tax cuts? And if so, what about company tax? To pay for hospitals and health?

And then back to the politics: Does anyone think the Prime Minister and Treasurer are in a good position to argue for “courageous” reform? That the Opposition leader will “do a John Howard” and support the two of them if they did?

This is the perfect recipe for caution and underperfo­rmance to become self-reinforcin­g. On an individual basis it’s also a good argument for risk-avoidance rather than risk-taking.

China has probably stabilised for now. This makes the Fed meeting in mid-September the next big trigger point.

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