/ 15 August 2007

Stock markets: Don’t panic, say analysts

Economists said on Wednesday that turmoil on global stock markets is likely to persist but ruled out a catastrophic crash in share prices that would hit consumers and their pension funds. The JSE ended in the red again on Wednesday as United States markets failed to give the local bourse direction.

Economists said on Wednesday that turmoil on global stock markets is likely to persist but ruled out a catastrophic crash in share prices that would hit consumers and their pension funds.

The most likely scenario is that recent falls amount to a ”correction”, a temporary slide in share prices caused by investors reassessing risk.

”Equity markets should recover later in the year,” said analysts at Capital Economics. ”Valuations are nowhere near as outrageous as they were during the dot.com bubble [of the late 1990s]. A further fall of 5% to 10% in equity prices should therefore be enough to make them attractive again.”

At the root of the current turbulence is fear about the exposure of banks and investment funds to unperforming home loans in the United States. This has become known as the ”subprime crisis”, with subprime loans being high-risk home loans made to Americans with poor credit histories.

The major worry is that banks with losses will restrict access to credit, which would hit companies and investors and eventually drag on world economic growth.

Already, the cost of borrowing has increased as banks tighten their lending practices.

Many analysts expect this and the upheaval in the US housing market to hit US economic growth, but not for the world economy to grind to a halt as some have suggested.

”Thus far the curtailment of credit and the rise in the cost of capital has been too recent and too small to have a significant impact on economic outcomes,” said analysts at investment bank UBS. ”The global economy is resilient.”

They added, however, that market turbulence means US economic growth is ”likely to be soggy in the second half of this year”.

Other analysts have pointed out that trading during the summer months in the northern hemisphere is often volatile because of a lack of liquidity. With many investors on holiday, a small volume of transactions can lead to exaggerated swings in trading.

Ripples caused by fear about the effects of investments linked to the US housing market have also been felt on other financial markets. The price of oil fell sharply last week as dealers worried that an economic slowdown would hit consumption of crude, but prices are rising again with investors reassured that energy demand is likely to remain strong.

On the currency market, the dollar has been boosted because of its status as a safe haven in times of instability, while the yen has risen as investors unwind risky foreign-exchange investments.

Calls for better regulation of financial markets have also been made, with some pointing the finger at lax lending practices by banks and the proliferation of complex, untested financial instruments that are being traded between investors.

Martin Wolf, a respected commentator in the Financial Times newspaper, argued in Wednesday’s edition that fear on global markets is a good thing, forcing investors to assess risk and their positions.

”Financial markets and particularly the big players within them need fear; without it, they go crazy,” he wrote.

The JSE ended in the red again on Wednesday as US markets failed to give the local bourse direction, but the gold sector bucked the trend to end in positive territory. A dealer said a weaker rand had helped the gold sector eke out some gains.

At the close, the JSE all-share index was off 1,02%. Resources lost 0,89%, but the gold mining index climbed 1,41%. The platinum mining index retreated 2,34%. Banks weakened 0,59%, financials dipped 0,81%, and industrials shed 1,27%.

The rand was bid at R7,31 to the dollar from R7,28 when the JSE closed on Tuesday, while gold was quoted at $668,55 a troy ounce from $668,90/oz at the JSE’s last close.

”Equity options close out in the States on Friday so American markets were all on a break, leaving the local bourse trading sideways today,” said a local trader.

He added that the weaker rand during the day helped advance gold stocks, but added the local currency was extremely volatile. He also pointed out that there were ”a lot of foreigners dumping local stocks”. — Sapa-AFP, I-Net Bridge