“The grizzlies are licking their chops,” says William Kay in The Sunday Times. Major world indices, including America’s Dow Jones, Germany’s DAX and Britain’s FTSE 100, have fallen by 20% from last year’s peaks and are thus officially in a bear market. Britain’s mid-cap index has lost almost 30% from last summer’s high. And “more trouble is surely in store”, says Lex in the FT.
The UK’s economic prospects are deteriorating at “an alarming rate”, says Citigroup’s Michael Saunders. The housing bust is accelerating amid the credit squeeze and consumers are tiring as highlighted by the plunge in consumer confidence to a 28-year low and falling sales at Marks & Spencer in the last quarter. The latest purchasing managers’ surveys of manufacturing and services show a contraction in both sectors.
There is now a “better-than-evens chance” of an outright recession, reckons Capital Economics. Enduring price pressures – the British Chambers of Commerce survey showed firms hope to raise their selling prices – means there is scant scope for the Bank of England to temper the downturn with interest-rate cuts. The sliding economy is putting pressure on financial stocks, which comprise around a fifth of the FTSE 100. British and other European banks may have raised enough capital to compensate for credit losses, such as those on mortgage-backed securities, says Jeremy Warner in The Independent. But the worry now is that they may need more money due to “a more conventional bad debt experience coming through as the economy heads south”.
Meanwhile, the heavyweight mining sector has been on the slide, says Neil Hume in the FT. Commodity-related stocks make up around 36% of the blue-chip index. The mining sector has fallen around 17% since mid-May as investors have become increasingly worried about weaker growth in emerging markets as a result of soaring oil and food costs, which implies a slowdown in demand for commodities.
While an inflation-induced slowdown in emerging markets is a new worry, Asia is already beginning to be affected by the slowdown in the developed world. Dresdner Kleinwort notes that Asian export growth has fallen significantly in terms of underlying volume – China’s year-on-year export volume growth is down to 8% from 30% early last year. And as we’ve noted before, Asian consumption is too small to offset major retrenchment by industrialised consumers. China and India account for just a sixth of US demand. Consumption growth has been “sluggish and decelerating” in most Asian states over the past few years anyway, says Dresdner.
Veteran analyst Marc Faber is pencilling in a “big correction” in industrial commodities, including oil, as the global slowdown intensifies. As Asia and the emerging markets begin to slow more rapidly next year, there will be a knock-on effect on Europe, says Khuram Chaudry of Merrill Lynch. Earnings estimates for 2009 “appear too high”.
Estimates for this year are also “still wrong”, as JP Morgan’s Mislav Matejka puts it. Analysts expect 7% growth in 2008 and 10% in 2009. There are plenty of downgrades ahead as investors adjust to the worsening outlook. Marks & Spencer’s 25% slide last week shows that even the stocks where the market has supposedly been expecting lower earnings managed to give investors a fright, says Tony Jackson in the FT. “Where does that leave the rest?” Earnings are so far around 5% down from their peak and, according to Graham Secker of Morgan Stanley, the average fall in peak-to-trough earnings in Britain is 30%, says Jackson. “There is plenty more damage to come.” In short, says Nick Clark in The Independent, it looks as though the bear is “only just beginning to sharpen his claws”.
Small-cap market hits turbulence
Aim, the exchange for small, fast-growing firms, has hit turbulence. Market downturns are always bad news for risky small-caps. The Aim All-Share index has slid to a three-year low and the number of flotations is expected to fall to under 100 in 2008.
But there’s another reason Aim is struggling, says Dominic Frisby in our free daily investment email, Money Morning. Investors buy and sell to market makers, rather than to each other, and the makers’ spreads can be “outrageous” – making it hard to make money. This discourages investors from buying and selling, thus denying the market liquidity.