China’s market could see rally following Olympics
The Olympic Games kicked off in Bejing Friday, yet China’s Shanghai market took a steep 5.2% hit overnight. Despite the dip, a rally may be on the way following the Games, as countries that have hosted the Olympics in prior years have seen their equity markets swiftly advance.
According to Ned Davis Research, there is indeed a steadfast trend showing that the country which hosts the Summer Olympics enjoys a robust stock market rally after completion of the games.
“Data over the past 20 years show that the host country’s stock market has consistently outperformed the world’s equity markets by an average of 17.6% for the six months following the end of the games,” Bill Greiner, Chief Investment Officer of UMB Asset Management and UMB Bank, and Chief Economist for Scout Investment Advisors, said in an email Friday.
According to Greiner, the host country’s economy experiences an increase in economic activity leading up to the games, while following the games growth wanes. As a result, the equity markets in the host country see an uptick in liquidity on account of lower interest rates as a result of the overall decline in building and economic activity.
Of course the real story may be that China’s economy is beginning to slow and that is the driving force behind the staggering stock market decline.
According to Don Straszheim, Vice Chairman of Roth Capital Partners, Beijing has made a major shift in policy over the last two weeks from focusing on rampant inflation to focusing on slowing economic growth. “Pre-occupation with the Olympics has deflected investors’ attention from the policy shift,” writes Straszheim. “It is the global slowdown, not the Olympics being over, that is precipitating China’s slower GDP.”
According to Straszheim, China’s real GDP growth in 2008 is expected to clock in at 9.5%, down from the average 10% to 11% real GDP gains experienced over the past 5 years.
Some experts purport that China’s growth may be retarding as a result of the sluggish U.S. economy. The notion of decoupling may be thrown out the window if the current down turn continues to play out as it has been—China slowing as the U.S. slows.
“As the U.S. economy goes, so goes the world,” Greiner writes. “…‘if we ain’t buyin,’ they ain’t makin.’ This is the real problem in the Chinese equation.”
Perhaps the Olympics will warrant a welcome pop in China’s market, but until growth picks back up in the United States and China a longer term rally could be on hold.
