By now most of you have heard news about the financial crisis in Greece, also referred to as the “Grexit,” the potential exit of Greece from the European Union, and some of you have heard about significant drops in stock prices in China. Therefore, I want to make sure everyone understands how we are managing your money through these crises.
Greece
If your portfolio is 100% allocated to equities, then your exposure to Greece is 0.02%; if you are in a balanced allocation of 50% in equities and 50% in bonds, then your Greece allocation is 0.01%; etc. So the direct impact of the Greek crisis on your portfolios will be negligible.
The Greek stock market is less than 1% of the global stock market, and the Greek economy is about the size of Maryland’s. The “contagion” risk that the Greek crisis spreads, first to Spain and Italy, and then beyond, is more specifically the risk that citizens in those other countries panic and begin withdrawing their money from the banks in the fear that their own governments may also default on debt. Likewise, fearful investors could refuse to buy newly issued debt from these countries. The European Central Bank (ECB) can most likely contain both of these potential risks. It is already buying debt and can do much more of that. The ECB can also lend against the collateral guaranteed by these governments. These efforts should help maintain confidence and greatly reduce the risk of contagion.
I have communicated with Dimensional Fund Advisors, with whom we have our small Greek exposure. They are proceeding cautiously and are not currently purchasing additional securities in Greece for our equity strategies.
China
The Chinese stock market has dropped 25–30% in June, and therefore it is in official bear market territory. This drop has occurred in the companies that trade on the mainland-China stock exchanges in Shanghai and Shenzhen. Due to significant restrictions around repatriation of capital, we do not invest in companies that trade on those two exchanges. Our exposure to China is through companies that trade on the much more developed Hong Kong exchange, and currently includes ownership of 465 of these companies (out of nearly 4,000 emerging-market companies that we hold in total), with a combined allocation of just under 2% for a portfolio invested 100% in equities and just under 1% for a balanced portfolio with 50% allocated to equities.
The Chinese companies that we own dropped 6% in June. Due to the diversification across many countries, our emerging-markets strategy dropped 2.7% in June. Most Abacus portfolios were roughly flat for the quarter.
The largest exposure to any emerging-market country that we currently allow is about 2% (right where China currently is) for a 100% equity portfolio and 1% for a 50% equity portfolio. We put this restriction in place to make sure that no single emerging-market country could end up dominating the others in risk exposure, thus minimizing the negative impact of crises like the current ones in China and Greece.
Even so, there will be additional global market corrections over the balance of your investing lifetime, and none of us knows when they will begin, how long they will last or when they will recover. (To this point, please see my last quarterly CIO commentary, “The Inevitable,” which can be found at https://abacuswealth.com/the-inevitable.) Trying to extrapolate any short-term event as the beginning of a broader and deeper decline is fraught with danger. Note the many predictions in recent years that the next market crash would be caused by central banks slowing quantitative easing, Southern European bank problems or oil price declines. When the crash comes, there will be no shortage of pundits telling us what caused it, although the true causes are much more widespread and complex. Given this, we do know that we have taken the most rational steps with your money—planning-based and goal-focused allocations, broad diversification across many asset classes, deep diversification within each asset class, low investment expenses, tax minimization and a disciplined “buy low and sell high” rebalancing policy—in a world that is always and everywhere full of uncertainties.
Note from Our CIO: Greece and China
The Abacus Investment Committee
Please note the publish date of this blog. Financial information, market conditions, and other data mentioned in this post may no longer be accurate or relevant.
By now most of you have heard news about the financial crisis in Greece, also referred to as the “Grexit,” the potential exit of Greece from the European Union, and some of you have heard about significant drops in stock prices in China. Therefore, I want to make sure everyone understands how we are managing your money through these crises.
Greece
If your portfolio is 100% allocated to equities, then your exposure to Greece is 0.02%; if you are in a balanced allocation of 50% in equities and 50% in bonds, then your Greece allocation is 0.01%; etc. So the direct impact of the Greek crisis on your portfolios will be negligible.
The Greek stock market is less than 1% of the global stock market, and the Greek economy is about the size of Maryland’s. The “contagion” risk that the Greek crisis spreads, first to Spain and Italy, and then beyond, is more specifically the risk that citizens in those other countries panic and begin withdrawing their money from the banks in the fear that their own governments may also default on debt. Likewise, fearful investors could refuse to buy newly issued debt from these countries. The European Central Bank (ECB) can most likely contain both of these potential risks. It is already buying debt and can do much more of that. The ECB can also lend against the collateral guaranteed by these governments. These efforts should help maintain confidence and greatly reduce the risk of contagion.
I have communicated with Dimensional Fund Advisors, with whom we have our small Greek exposure. They are proceeding cautiously and are not currently purchasing additional securities in Greece for our equity strategies.
China
The Chinese stock market has dropped 25–30% in June, and therefore it is in official bear market territory. This drop has occurred in the companies that trade on the mainland-China stock exchanges in Shanghai and Shenzhen. Due to significant restrictions around repatriation of capital, we do not invest in companies that trade on those two exchanges. Our exposure to China is through companies that trade on the much more developed Hong Kong exchange, and currently includes ownership of 465 of these companies (out of nearly 4,000 emerging-market companies that we hold in total), with a combined allocation of just under 2% for a portfolio invested 100% in equities and just under 1% for a balanced portfolio with 50% allocated to equities.
The Chinese companies that we own dropped 6% in June. Due to the diversification across many countries, our emerging-markets strategy dropped 2.7% in June. Most Abacus portfolios were roughly flat for the quarter.
The largest exposure to any emerging-market country that we currently allow is about 2% (right where China currently is) for a 100% equity portfolio and 1% for a 50% equity portfolio. We put this restriction in place to make sure that no single emerging-market country could end up dominating the others in risk exposure, thus minimizing the negative impact of crises like the current ones in China and Greece.
Even so, there will be additional global market corrections over the balance of your investing lifetime, and none of us knows when they will begin, how long they will last or when they will recover. (To this point, please see my last quarterly CIO commentary, “The Inevitable,” which can be found at https://abacuswealth.com/the-inevitable.) Trying to extrapolate any short-term event as the beginning of a broader and deeper decline is fraught with danger. Note the many predictions in recent years that the next market crash would be caused by central banks slowing quantitative easing, Southern European bank problems or oil price declines. When the crash comes, there will be no shortage of pundits telling us what caused it, although the true causes are much more widespread and complex. Given this, we do know that we have taken the most rational steps with your money—planning-based and goal-focused allocations, broad diversification across many asset classes, deep diversification within each asset class, low investment expenses, tax minimization and a disciplined “buy low and sell high” rebalancing policy—in a world that is always and everywhere full of uncertainties.
Disclosure
Abacus Wealth Partners, LLC is an SEC registered investment adviser. SEC registration does not constitute an endorsement of Abacus Wealth Partners, LLC by the SEC nor does it indicate that Abacus Wealth Partners, LLC has attained a particular level of skill or ability. This material prepared by Abacus Wealth Partners, LLC is for informational purposes only and is accurate as of the date it was prepared. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Advisory services are only offered to clients or prospective clients where Abacus Wealth Partners, LLC and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Abacus Wealth Partners, LLC unless a client service agreement is in place. This material is not intended to serve as personalized tax, legal, and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Abacus Wealth Partners, LLC is not an accounting or legal firm. Please consult with your tax and/or legal professional regarding your specific tax and/or legal situation when determining if any of the mentioned strategies are right for you.
Please Note: Abacus does not make any representations or warranties as to the accuracy, timeliness, suitability, and completeness, or relevance of any information prepared by an unaffiliated third party, whether linked to Abacus’ website or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
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