Global markets - from bad to worse

By Neville Bennett

Friday 28th February 2003

The global equity market is in worse shape than many realise. Investors have assumed "things are a bit quiet," as there is a pre-war lull, and the markets will find a positive direction as the Iraqi question is resolved.

The assumption the crisis will be resolved without unforeseen consequences is questionable; so too is the assumption the markets will be positive post-Saddam. But the main point is whether there is a lull at all.

There isn't. The Iraq problem is masking existing trends of declining equity prices, advancing credit creation and rising oil and gold prices. These trends were in place a year ago but some are accelerating, especially oil, which has surged to $US35 a barrel.

While most people are aware of the bear market, the sheer magnitude of the losses will come as a shock to many readers. Even experts may glean some insight from the broader picture.

Obviously Wall Street has suffered. In the past year the Dow has lost 18.5% and the Nasdaq 21%. The Dow is composed of a few, high-value stocks and it gains by a periodic change when it discards losers and recruits winners. So analysts often prefer to use different indices.

The S&P 500 is more useful for measuring the market's health. It had lost more than the Dow (21.5%). This is close to the Russell 2000, which has lost 20.5%.

This overall loss conceals some carnage in specific sectors. The Amex biotechnology index has fallen 32.5%. The Nasdaq high technology index lost 24.9%. These are widely tipped as the most important future growth sectors. Investors who sought safety have lost money in transportation (down 22.7%) and the ultra-safe utilities lost an amazing 26.7%.

Asia-Pacific has fared better. Using the most popular index for each country, Hong Kong was down only 14.3%, China 12.9%, Australia 17%, Japan 17.3% and Taiwan 19.6%. While there were good relative performances from India (steady) and Thailand (down 0.5%), there were heavy losses in Singapore (24%) and South Korea (23.6%)

Europe is a disaster area. Even that great role model, Ireland, lost 28.6%. The big exchanges suffered terribly. London lost 26.5%, the Swiss 32.1% and the Dutch 40.2%. France lost 34%, Belgium 34% and Italy 22%.

Germany was the worst performer, losing 45.4%. This is a mind boggling result. To add insult to injury, German house prices have been deflating since 1994 and have lost half of their 1990 value.

Germans are super sensitive to the value of money. Their folk memory is that families were wiped out by the inflation of the 1920s and the defeat of 1945. They have supported sound money policies (until recently) and will be hurt by the stock exchange's betrayal. The Swiss and Dutch are thrifty too and will find it hard to cope with a massive erosion of their wealth.

Thriving stock and housing markets create a "feel good" sentiment, which economists call the wealth effect. This increases consumer confidence and stimulates spending.

The reverse is happening in Germany. Like the Japanese, they will observe rising unemployment, which is close to record levels, and curtail their spending. Germany is a candidate for a severe downturn and is entering its second recession in two years.

This almost universal fall in equity values may also be undermining the financial security of a generation. The baby boomers of modern world expected to retire with a nice nest-egg or pension. But almost everywhere, those who invested in shares have taken large losses.

There could be worse to come. Some firms have been desperate to keep up their share value and have been tempted into creative accounting; this has caused massive losses to shareholders. That is bad enough but secondary to systemic financial difficulties.

Many firms have been hurt by the losses in the asset portfolios. Some have had to sell stock to maintain a required liquidity ratio. Australasians have seen AMP resort to raising capital to meet its London obligations. Should markets erode further, some insurance companies will be obliged to sell stock into a declining market.

Banks are also under strain. Japanese and now German banks are looking fragile. It must be remembered the collateral on their loan advances is sometimes in property or shares, both of which have broadly declined in quality.

A financial accident is a real threat. While no major bank, insurance company, securities firm or asset manager has gone to the wall, BCA Research says, "It is amazing that we have burst one of the great asset bubbles yet have not had any systemic financial sector problems."

Nevertheless, its "stress index" is still in the danger zone and even last December it warned it could not "rule out an accident, especially if the equity market has another major sell off."

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