It’s been a grim couple of days for global stock markets.
Indeed, it’s been a pretty bad year so far in fact. The first quarter was fine, but since April markets have struggled. So far in 2010, reports the Financial Times, the FTSE All-World Share Index is down by more than 10%, while safe havens have been the big winners.
US treasuries have returned 5.8%. The dollar is up 10.5% on a trade-weighted basis. And gold is one of the top performers, up 13%.
And the bad news for stock market investors is that it’s only set to get worse…
worse…
Stockmarket investors are in for a rough ride
It looks like all those ‘death crosses‘ peppering global markets weren’t just a melodramatic figment of chartists’ fevered imaginations.
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Global stock markets continued to slide yesterday. Of particular interest (from a technical point of view at least), the key US index, the S&P 500, closed below the important 1,040 level.
Now I realise a lot of people are dismissive of charting. That’s a mistake. I’m not going to pretend to be an expert on the topic – I can’t say that terms like Fibonacci and Bollinger get me terribly excited. But almost every investment professional I have any time for, pays at least some attention to technical indicators. And if for no other reason, that’s why you should too.
So why is the fall below 1,040 important? Because, as David Rosenberg of Gluskin Sheff put it, it’s been “the key line of support for the past five months.” Breaking through it is “not good” for equity investors. In fact, “a move to 880 on an interim basis seems likely… a retest of the March 2009 lows cannot be ruled out.”
So what gives? There were any number of pieces of news yesterday to peg the panic on. And we’ll look at them below. But in short, the ‘stimulus’ rally that kicked off in March 2009 ended in April 2010, in developed markets at least. Now investors are looking for evidence that the economy can stand on its own two feet, without government aid. And in all corners of the globe they’re being sorely disappointed.
But there is some good news in Europe
Let’s start with the good news. It seems that European banks aren’t quite as dependent on the European Central Bank as might have been feared. Today banks have to repay the ECB the €442bn it loaned them a year ago. The ECB offered banks the chance to ‘roll over’ the money into three-month loans. But banks have apparently just taken up €131.9bn of this offer. We covered this in more detail a couple of days ago. But in short, this suggests that most banks were able to get hold of any money they needed in the markets, which is reassuring.
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But of course, when you catch a rare glimpse of positive news for the eurozone, you can be sure that a ratings agency will pop up to remind you of the grim reality. And yesterday was no exception. Moody’s pointed out the Spain faces ‘deteriorating’ growth prospects and challenges in meeting its fiscal targets. And that means its AAA credit rating is in jeopardy.
Now this is hardly news. The other two big credit ratings agencies, Fitch and S&P have already downgraded Spain. Yet the timing is rather pointed – Spain is trying to borrow €3.5bn over five years in the markets today. It’ll be interesting to see how that goes, although no doubt the ECB will step in if Spain’s cost of borrowing looks like it’ll be driven too high.
China’s cooling economy is the main threat
So Europe remains a worry. But what’s really thrown markets into a spin this week is the threat that China’s economic growth might be slowing down a little. Investors still seem to harbour this hope that China is going to lead us all into a land of never-ending economic growth as it becomes the next global superpower. So news this morning that China’s manufacturing sector is slowing more rapidly than forecast, was more than enough to keep markets in pessimistic mode.
Now China has plenty of good things going for it. And we’re in no doubt that the rise of Asia and emerging markets in general is a trend that will continue (if you haven’t already signed up for Cris Sholto Heaton’s free MoneyWeek Asia email, I suggest you do so now.
But it’s not going to happen overnight. And it’s not going to be a smooth transition process. With all the bad debt floating around China’s banking system, there’s bound to be a bust to go with the boom at some point. China will have enough problems managing its own economy in the years to come without worrying about bailing out the rest of us too.
What should investors do?
So what can investors do? Rosenberg tips “Safety and Income at a Reasonable Price (SIRP)” as a strategy. Basically this isn’t very different to what we’ve been recommending for a while. “A core holding of precious metals in the portfolio” to protect against “global financial, economic and geopolitical instability”. And on stocks, you want to look for “strong balance sheets, positive net free cash flow yield, earnings stability, non-cyclical sectors and dividend growth and yield”.
In the latest issue of MoneyWeek (out tomorrow) my colleague Tim Bennett looks at how to find such stocks. (If you’re not already a subscriber, subscribe to MoneyWeek magazine.)
Our recommended article for today
Mining stocks: a cheap play on gold
Compared to the wider stockmarkets, precious metals miners have performed well. But they haven’t kept pace with gold’s record highs. So now’s the time to buy in while they’re still cheap, says Steve Sjuggerud.