WE COULD be past the tipping point of describing the tailspin in world stock markets as a “correction”. Slide verging on impending slump might be more accurate now. Shanghai lost a further near-9 per cent yesterday after its 11 per cent fall last week.
The contagion has hit other Asian markets, Wall Street, the UK and Europe again, with investors worrying about a perfect storm developing of a race to the bottom in currencies following China’s yuan devaluation due to its economic slowdown, falling commodity prices and a further significant weakening in the oil price.
Oil largely drives the global economy, so no good news there. The problem is currently there does not appear to be any ready–made solution to the problem. Will China devalue again and foment beggar-my-neighbour devaluations throughout an already emerging market region? Will the major UK and US companies, which earn much of their bread in emerging markets, be prey to earnings downgrades and create a vicious circle in their stock markets?
Some bulls are saying the market falls in recent weeks are creating a buying opportunity. That the earnings potential of western companies is greater than the distraction of this short-term volatility. Ye…sss, as Jeremy Paxman might say.
However, the bullishness is beginning to have a staler tang with each passing day as fears mount. And for every investment guru who advises that you should buy when there is blood in the street, there will be one who says don’t catch a falling knife.
When does bargain-hunting become something strictly for the birds? There is not quite the transient apocalyptic feel we had during the financial crisis of 2008, but we are now probably looking at the nearest in gathering apprehension to those times.
What is happening in Asia also has echoes of the disturbing financial turmoil in the region in 1997-98. Fear is as contagious in the stock market as greed, and that is what we are seeing. The west has depended on China, the world’s second-biggest economy, for a long time to keep the overall macro picture sweet.
Since the financial crisis broke, Chinese economic expansion has contributed more than 50 per cent of all worldwide growth, according to figures from Tilney Bestinvest.
Financial markets are joined at the hip with that growth and the prospects for it to continue, so will be bound to march in tandem with any faltering of momentum.
The UK’s blue-chip Footsie index earns only a quarter of its revenues in the UK; its business constituents are a heavy play on the health of emerging markets, the ones currently caught in the slipstream of doubt from China.
In addition, for at least a decade the FTSE 100 has had mining and oil and gas as a significant swing sector. As both industries have fallen out of bed in a big way since demand from China has dried up that is a further big weight on investor sentiment here.
In short, the darkest hour may be before the equity-buying dawn. But you will need strong nerves.
Lloyds – a soap opera that will run and run
The selldown in the taxpayers’ stake in Lloyds Banking Group has as many episodes as TV’s Eastenders, and George Osborne hails each one as “fantastic”.
It’s amost as repetitive as the “long-term economic plan” the government occasionally mentions. Not inaccurate, just a law of diminishing returns.