the bears
Donna Block
Fasten your seat belts, we’re in for a bumpy ride. The market chaos we have been witnessing this week is the result of Japan’s dithering with its economic policy. Japan, which not so long ago was the economic envy of the Western world, has plunged into recession and its economy is drowning in a mountain of bad debt. Until now, most analysts believed the crisis could be contained within Asia; they now agree this was wishful thinking.
The uncertainty in Japan and the falling yen sent share prices crashing and panic spreading throughout world markets this week – and the rollercoaster ride is far from over. Most markets are experiencing lows when only a month ago they were hitting all-time highs.
Stock market losses are being registered from continent to continent. Exports to Asia from the West are becoming too expensive, and as a result corporate earnings in North America and Europe will take a hit. Simply, we could be heading for a worldwide slowdown from which no one will escape.
The yen’s latest decline was prompted by concerns about the ability of the new Japanese government to turn the economy around. Japan has officially admitted the economy is in a “prolonged slump”, according to an economic planning agency report.
This in turn has prompted concern that the yen’s weakness might trigger devaluations of the Hong Kong and Chinese currencies. The devaluation of the Chinese yuan would spur an even bigger economic mess. It will start a domino effect and currencies across Asia will be forced to devalue.
The wake-up call came when the United States market lost 300 points , or 3,4% last week. The plunge shaved $1,1- trillion from the total market value of New York Stock Exchange shares. On Tuesday it fell another 250 points, but recovered more than half that loss by the close of business, after news that US Secretary of the Treasury Robert Rubin and Japanese Minister of Finance Kiichi Miyazawa will meet in San Francisco in September. A good move.
Another glimmer of hope came when Japan announced it was prepared to defend the yen. Share prices in most markets started moving up. But analysts remain sceptical.
Ricky Harrington, a technical analyst at Interstate Johnson Lane Securities Corporation in the US, characterised the advance as merely a “dead cat bounce” – market slang for a weak market’s tendency to bounce back temporarily after a big fall. The fundamental problems are still there. The Asian situation is not going away and corporate earnings will most certainly be affected, he said.
The markets in the West may have caught the Asian flu, but emerging markets have come down with pneumonia. Emerging markets have been traumatised by the domino. Foreign investors have stampeded the exits and the sheer amount of money flowing out has caused a crisis.
The backlash of Asia’s financial crisis has also given South African shares the emergent-market knock. Prices have declined more than 25% from their high in April and the rand has depreciated more than 30% this year. The economy has been shaken and is adding to the woes of the African National Congress in an election year.
For the ANC, the economic downturn could not have come at a worse time. Higher interest rates have already started to hurt growth, which has slowed to 2% and boosted unemployment. Company failures are reaching record highs and high interest rates are creating hard times for the business community. To make matters worse, low share prices will also have an effect on pension funds as they lose their value and on those who must liquidate positions to raise cash.
According to Mike Schussler, of Future Bank Corporation, we may experience a longer bear market than the one in 1987, which lasted a year. The South African market has had two high points and two major declines of more than 20% in a year. The country will be in a technical recession going into next year’s elections and with the high interest and low savings rates, people are going to be struggling.
Markets – developed and emerging – are going to continue to be volatile. Investor expectations will swing wildly, and they have to face simple market facts: what goes up does come down. Those market bears have come out of hibernation and they’re ready to make their presence known.
Markets will eventually recover and some will take longer than others. Investors can look at this as either an opportunity to go bargain hunting, or as a loss of wealth. Either way, it’s time to buckle up, grin, and “bear” it.