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Investors Beware The Greek And Chinese Stock Markets!

The Athens stock market, the Athex, reopened Monday morning after a five-week closure, and as expected it immediately went into freefall — it lost 23% in early trading, which is huge as one-day losses go, but at the time of writing it has recovered a few points and is down only around 20%.

The market had been closed since just before Greece imposed the capital controls that kept its banks shut, and the banking sector was expected to be the hardest hit. And so it came to pass, with all the big banks crashing by 30%. But before you go thinking that a 30% fall for banks operating in such a troubled economy isn’t so bad, that’s the biggest one-day fall allowed in Greece’s controlled stock market — so we should probably expect them to fall further tomorrow.

Government meddling

Imposing a rigid control on daily share price movements is a key feature of that other sick stock market, the Chinese one. But in China the government’s interference is considerably more severe and hamfisted — state enterprises have not only been forbidden from selling shares in order to help prop up falling prices, they have even been ordered to buy more!

But it hasn’t helped, as weak manufacturing data helped push the Shanghai Composite down 1.1% on Monday, while the small cap ChiNext index lost a crunching 5.5%. The country’s factory output levels have slumped to a two-year low, while China’s once-booming property market continues its sluggish phase.

Meanwhile, Chinese authorities are blaming everyone bar themselves for the stock market’s woes — first it was “foreign forces”, then over the weekend the finger has started pointing towards “traders” who are now being blamed for the market’s 30% fall over the past month. Never, it seems, could it be the government’s fault for talking up the bubble in the first place in a horribly over-leveraged market.

Investors wiped out

A distraught Chinese investor with the apposite nickname of Plato was quoted by the BBC as saying “People trusted the government but the government let them down. It encouraged people to buy stocks but it’s turned out to be a joke. The lesson is never trust the government“. And he’s right, certainly when it comes to investing in shares, because that requires a free market in which buyers and sellers set prices, not a bumbling government attempt at a financial Great Leap Forwards.

These two tales of disaster illustrate two of the things you should, in my view, never do as an investor. Firstly, obviously, you should never invest in a government-manipulated stock market of the kind we see in China.

But secondly, do not invest in a country that is not in control of its own economic levers and which does not have its own lender of last resort. Greece has no say over interest rates or money supply, but has to suffer whatever Germany dictates. And it cannot rely on the ECB to provide the credit needed to bolster its banks and save its economy from bankruptcy in times of crisis, the way the UK’s economy and its banks can rely on the Bank of England.

Markets you trust

No, things for investors look set to get a whole lot worse in both Greece and China before they get better. So I’d urge UK investors to stick to the two countries that enjoy market freedom and economic sovereignty — our very own London Stock Exchange, and the stock markets of the US.

And stick to an investment approach that has brought great long-term rewards for a century and more.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.