July 15 2015
It’s a cautionary tale…
Many Chinese investors were so optimistic about the prospects for Chinese stock markets they bought on margin, meaning they borrowed money to buy stocks. Borrowing to invest has been so popular that the amount of margin loans doubled in just six months to about $320 billion, according to Barron’s. Experts cited in the article said, “…margin financing in China is equal in size to Indonesia’s entire stock market valuation and as high a portion as it has been in any market at any time…”
The problem with buying on margin is repaying the loan if stocks move in the wrong direction. Since the middle of June, Chinese stock markets have lost more than $3 trillion, reported CNN.com. Barron’s explained how margin works:
“In China, a typical investor can borrow $1.25 for every dollar of cash she has, giving her what China calls a “guarantee ratio” of 180 percent, or $2.25 (cash and stock bought on margin) divided by $1.25 (loan value). But, as her stock loses value, the guarantee ratio also falls. At 150 percent, the broker will start to issue margin calls. When the ratio hits 130 percent, the brokerage will force the liquidation of the position to meet the loan.”
About 80 percent of the investors in China’s markets live in China. Many have suffered significant losses as markets have moved lower.
The BBC reported China’s market regulator responded to the market downturn by making it even easier for people to borrow money to invest. Apparently, the hope is small investors will put more money in stocks. Regulators also banned investors who hold 5 percent or more of a company’s stock from selling their shares for six months.
By the middle of last week, Chinese markets had stopped losing value. Only time will tell whether they have truly stabilized.
Closer to home, the New York Stock Exchange (NYSE) suffered a computer glitch that halted trading for several hours last week. The NYSE tweeted, “The issue we are experiencing is an internal technical issue and is not the result of a cyber breach.”
- Data as of 7/10/151- WeekY-T-D1-Year3-Year5-Year10-Year
- Standard & Poor’s 500 (Domestic Stocks)00.0090.0570.1570.140.055
- Dow Jones Global ex-U.S.-1.52.2-18.104.22.168
- 10-year Treasury Note (Yield Only)2.4N/A22.214.171.124.1
- Gold (per ounce) -0.7-3.3-13.5-10.1-0.810.6
- Bloomberg Commodity Index2.5-4.8-24.3-10.3-4.6-4.5
- DJ Equity All REIT TR Index1.8-2.36.810.114.26.9
*Indices are unmanaged and investors cannot invest directly in an index.
*Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
*S&P 500, Gold, Dow Jones Global ex-Us, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend).
*The DJ Equity All REIT Total Return Index does include reinvested dividends.
*All investments involve risk – coins and bullion are no exception. The value of bullion and coins is affected by many economic circumstances, including the current market price of bullion, the perceived scarcity of the coins and other factors. Therefore, because both bullion and coins can go down as well as up in value, investing in them may not be suitable for everyone. Since all investments, including bullion and coins, can decline in value, you should understand them well, and have adequate cash reserves and disposable income before considering a bullion or coin investment.