China or COVID: Which is the biggest threat to Aussie markets?

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Right now, everything we hear is either about COVID or China and how this will affect not only our stock market but the economy. Despite the current situation with COVID still being very fluid, there is light at the end of the tunnel and the Australian economy is coping.

The good news is that the government knows, based on what unfolded in 2020, that it can restart the economy pretty quickly if it needs to. The challenge with this, however, is China and how they respond to the current tensions between our two countries.

There are concerns around China's economy and the potential collapse of one of its largest property developers, Evergrande. Speculators are suggesting that if Evergrande fails, this could result in the Australian stock market crashing, which I strongly disagree with.

china evergrande collapse crisis

We know that China is growing given that its GDP growth in the third quarter of this year is 7.9%, which is on the back of record growth of 18.30% in the second quarter. In fact, if we look at the past 12 quarters since 2018, 11 were positive.

If we exclude the record second-quarter growth this year, the average growth in the remaining 10 positive quarters is 5.97%, which is above both Australia and the US over the same time. Australia's GDP growth in the second quarter of this year rose by 9.6% while the US achieved GDP growth of 6.6%.

Given the current economic climate, the probability of the market crashing is low, therefore, I recommend those who have a longer-term view continue to hold rather than sell. If you are more of a short-term investor, you may have already sold or you are looking to exit with a view to re-entering the market once it settles.

The best and worst performing sectors this week

The best-performing sectors include Utilities up more than 4% followed by Energy up more than 3% and Communication Services up more than 1%. The worst performing sectors include Financials down more than 2% followed by Materials down more than 1% while Industrials is just in the red.

The best performers in the ASX/S&P top 100 stocks include AusNet Services up more than 30% after a takeover bid from Canada's Brookfield followed by AGL up more than 8% and REA Group up more than 7%. The worst-performing stocks include Lynas Rare Earths down more than 8% followed by Bluescope Steel and Link Administration, which are both down more than 5%.

What's next for the Australian share market

With the bearish news about China and how this will continue to negatively impact the Australian stock market, you would think it would be falling heavily.

Yet it is holding up quite well so far this week, which is not surprising, as often the big end of town use the news to make profits for themselves and do the opposite of what you might expect, which is to buy rather than sell.

After being down around 3% earlier in the week, the Australian stock market bounced back strongly to be just in the red and while the market may close higher than it opened this week, I am not getting excited just yet.

My opinion as to the direction of the Australian market has not changed, it will stay bearish in the short term until it confirms otherwise. Earlier this week, the All Ordinaries Index achieved its lowest low in 12 weeks with the market down more than 5% since its all-time high in August.

Given this I expect the next low to occur sometime in the next month with the market likely to fall below 7200 points. Remember, you shouldn't make decisions based on news and speculation, as such I don't recommend investors panic and sell their stocks, instead they should get ready to buy in November.

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Dale Gillham is chief analyst for Wealth Within (AFSL 226347). He has an Advanced Diploma and Diploma of Share Trading and Investment and more than 25 years' experience in the financial services industry.