Tuesday, 9 February 2010

Current market turmoil: A case of deja vu?

Present scenario mirrors that in early 2007, but long-term traders may pick up bargains

2 comments:

Guanyu said...

Current market turmoil: A case of deja vu?

Present scenario mirrors that in early 2007, but long-term traders may pick up bargains

By Goh Eng Yeow
08 February 2010

The Golden Tiger has not even made its Chinese New Year appearance yet, but investors are complaining that they are getting badly mauled.

Regional equities have plunged nearly 10 per cent in a fortnight amid the biggest stock market correction since the dark days of March last year, when the global financial system nearly collapsed.

It’s almost like the bad old days of the financial crisis once more. The uncertainties hint at more turmoil to come that may afflict markets - and worrying similarities between the present time and February 2007.

What rocked regional markets was a 2.6 per cent drop on Wall Street last Thursday, as it reacted with alarm over the growing debt crisis in Europe.

It has been well known for years that countries like Greece have been living well beyond their means by borrowing heavily on the international financial markets. Greece’s financial difficulties have snowballed with such alarming speed in the past few months that it now has to offer an interest rate of 7 per cent to persuade investors to buy its bonds, compared with 4.5 per cent a few months ago.

The big worry is that Spain and Portugal are suffering from similar problems - and the costs of insuring their debts against default are also tipping perilously close to ‘no hope’ territory.

Throw in the uncertainties of Britain as it copes with its own mounting debt problem and the prospects of a hung Parliament after a general election later this year, and the confusion is complete.

The sovereign debt crisis sent Singapore stocks tumbling by 2.9 per cent over Thursday and Friday.

While Europe may be a world away from Singapore, major European lenders such as HSBC Holdings, Societe Generale and Deutsche Bank have deep roots in the region.

It is the fear of how this latest crisis may affect them and the impact this would then have on the region - where they are big lenders - that might be causing investors sleepless nights.

Even more unsettling for investors is the uncomfortable chain of events that brought unhappy reminders of 2007. Back then, investors got an early warning of the oncoming global credit crunch when the overheated Shanghai stock market suddenly plunged 9 per cent on Feb 27 and triggered a stock market crash around the world.

So it is with some nervousness that investors are watching the latest bout of turbulence on the red-hot Shanghai market after China’s central bank stepped on the brakes to stop the escalating build-up of loans by major mainland lenders.

While the fall in Shanghai this time around is nowhere as eye-catching as the one-day plunge in 2007, its impact is almost as calamitous.

It ruined a nascent post-New Year global stock market rally as jittery investors woke up to the possibility that China might not be quite the locomotive of growth powering the frail global economy.

Shanghai’s February 2007 collapse was not an isolated event. It was followed by another plunge the following month when giant lender HSBC Holdings revealed that the mortgages it had extended to US sub-prime lenders were souring rapidly.

That offered an early warning of the slow-moving hurricane in the US sub-prime crisis that transformed into a global financial tempest.

Substitute the rotten US housing market with the spectre of sovereign debt defaults by Europe’s weakest economies - and the uncanny resemblance is worrying.

As if that is not bad enough, March 2007 also recorded one other stock market plunge, which was triggered by worries over the unravelling of the giant yen carry trade, as the appetite for risks soured and investors fled to the safety of safe haven currencies like the yen.

Guanyu said...

Well, the yen carry trade has been replaced by the far bigger US dollar carry trade, with hedge funds borrowing billions at almost no costs to make huge bets in the region after the United States central bank pared interest rates to nearly zero last March.

There is no prize for guessing the scale of the stampede that might occur if these funds experience a squeeze from any strengthening in the weak greenback or a jump in borrowing costs when the US Fed starts to raise interest rates.

So what should an investor do under the uncertain circumstances?

As CLSA Securities points out in its tongue-in-cheek Feng Shui Index report, Tiger years are marked by dramatic changes and even upheavals. It advises investors to stay invested, quoting from a Chinese saying that ‘once on a tiger’s back, it’s hard to get off, but if you hang on, it’s certainly the best place to be’.

So as investors prepare for a fresh roller coaster in the stock market, they may like to recall that like the previous financial storms in the past three years, the latest one may also come to pass.

The fresh turmoil may well be an excellent opportunity for long-term investors to pick up bargains in the stock market. Gong Xi Fa Cai.