Are equity mar­kets about to bot­tom out?

Financial Mirror (Cyprus) - - FRONT PAGE -

In­vestors look­ing to cash in on the cur­rent eq­ui­ties rout will no doubt be scratch­ing their heads in ut­ter con­fu­sion. 2016 was sup­posed to her­ald a time of eq­ui­ties sta­bi­liza­tion, with the all the anx­i­ety of the De­cem­ber 16, 2015 rate hikes a thing of the past. There was tremen­dous volatil­ity in cur­rency mar­kets and eq­ui­ties mar­kets ahead of the rate hike with no clear in­di­ca­tion which way mar­kets would go. By the time liftoff took place, all the vari­ables had al­ready been fac­tored into the mar­kets and a pe­riod of sta­bi­liza­tion was ex­pected head­ing into the New Year.

But then all hell broke loose and Chi­nese bourses crum­bled within the first week of trad­ing. Two days of 7% de­clines rocked the Shang­hai and the Shen­zhen Com­pos­ite In­dex and this had a dev­as­tat­ing ef­fect on global eq­ui­ties mar­kets. From Hong Kong to Paris, Lon­don to New York, mar­kets have been reel­ing. The lat­est such catas­tro­phe took place on Wall Street on Fri­day the 15 Jan­uary, 2016. It was then that all of Wall Street’s ma­jor av­er­ages plum­meted on the news of crude oil weak­ness and widen­ing cracks in the Chi­nese econ­omy.

Wall Street stocks have fluc­tu­ated wildly as in­vestors try to gauge mar­ket sen­ti­ment on a day-to-day ba­sis. As oil prices breach new lows, con­fi­dence in the global econ­omy plunges. This has re­sulted in steep sell­offs across all ma­jor av­er­ages in­clud­ing the fol­low­ing: - The S&P 500 lost 2.16% to close at 1,880.33 - The NAS­DAQ shed 2.74% to close at 4,488.42 - The Dow traded 2.39% lower to close at 15,988.08 The de­clines on Wall Street were matched by de­clines else­where. In France, the CAC 40 closed 2.38% lower at 4,210.16 and in Ger­many the DAX closed 2.54% lower at 9,545.27. In Lon­don, the FTSE 100 in­dex shed 1.93% to close at 5,804.10. All of th­ese de­clines are the net ef­fect of China weak­ness and oil price de­clines cou­pled with a bear­ish tidal wave that has swept the world. As it stands, eco­nomic an­a­lysts, in­vestors and traders alike are un­cer­tain where the cur­rent bot­tom in the mar­ket is. Ev­ery time it ap­pears as if the price of oil has hit a sup­port level, it gives way and new lows are recorded. The big shock on Fri­day was when the $30 sup­port level gave way un­der mas­sive over­sup­ply and slack de­mand. to be grow­ing do­mes­tic de­mand. Gold has been ral­ly­ing on the back of weak eq­ui­ties de­mand, but even the gold price has re­traced from its 9-week high of $1,112 per ounce. The pre­cious metal is now trad­ing at $1,090 per ounce.

The pull/push fac­tors driv­ing gold are strangely cor­re­lated. For ex­am­ple, the price of gold is in­versely cor­re­lated with the strength of the USD. As the dol­lar gains ground, the gold price plunges. But at the same time gold tends to rally when eq­ui­ties mar­kets are weak. We have a sit­u­a­tion now where eq­ui­ties mar­kets are weak as a re­sult of in­ter­est rate hikes in the US, weak­ness in China and his­toric lows for crude oil. The Shang­hai Com­pos­ite In­dex closed the trad­ing ses­sion on Fri­day 3.55% lower at 2,900.97. Th­ese sharp de­clines have be­come com­mon­place in China de­spite govern­ment in­ter­ven­tion. One of the prob­lems in China eq­ui­ties mar­kets is over-val­u­a­tion. While western coun­tries’ stock mar­kets like the US, UK, Ger­many, Switzer­land and Canada typ­i­cally trade at un­der 20 times earn­ings, Chi­nese eq­ui­ties trade at 57 times earn­ings. We are now in the midst of the eq­ui­ties bub­ble melt­down in China and it doesn’t mat­ter what the au­thor­i­ties in Bei­jing are try­ing to do to ar­rest the de­clines; there is sim­ply no ap­petite for main­tain­ing over-val­ued stocks on the Shang­hai Com­pos­ite and the Shen­zhen Com­pos­ite indices. of late. There is sub­stan­tial weak­ness in eq­ui­ties with sen­ti­ment heav­ily bear­ish. But when will mar­kets bot­tom out? For an­a­lysts this ques­tion is as per­plex­ing to­day as it was when the com­mod­ity price rout be­gan. The prob­lem is that no­body knew the ex­tent of the weak­ness in the Chi­nese econ­omy. We are see­ing widen­ing cracks all the time.

Not only is the Peo­ples Bank of China en­act­ing quan­ti­ta­tive eas­ing mea­sures to fur­ther stim­u­late the econ­omy, but there are moves afoot to weaken the CNY to kick­start Chi­nese ex­port growth. Th­ese pol­icy mea­sures do not go un­no­ticed by other emerg­ing mar­ket economies: now we are see­ing re­cip­ro­cal mea­sures be­ing adopted to make China’s com­peti­tors more com­pet­i­tive with the world’s se­cond largest econ­omy.

That ma­jor banks and fi­nan­cial in­sti­tu­tions have called $20 oil a real pos­si­bil­ity has not helped mat­ters. At cur­rent prices, there is still sub­stan­tial room for oil prices to drop and for ev­ery down­ward re­vi­sion in prices, we can ex­pect eq­ui­ties to fol­low suit. How low can eq­ui­ties mar­kets go? This is a ques­tion that even the sharpest minds refuse to put a num­ber on. Suf­fice it to say, Jan­uary is con­sid­ered the month that in­vestors must get through be­fore any clar­ity is gained on equity prices. The good news about fall­ing share prices is that value stocks be­come avail­able.

Tech stocks on the NAS­DAQ and min­ing stocks on the Dow be­come far more af­ford­able and the in­evitable turn­around is bound to oc­cur sooner or later. For the time be­ing, ad­vi­sors have the per­fect win­dow-pe­riod to re­bal­ance fi­nan­cial port­fo­lios be­fore the rush to buy eq­ui­ties kicks in. For ex­am­ple, if you’re the type of in­vestor whose port­fo­lio is heav­ier in Trea­suries, CDs and sav­ings you may wish to con­sider di­ver­si­fy­ing into eq­ui­ties now that prices are cheap. We are not at the bot­tom yet, but we are get­ting close. The end of Jan­uary ap­pears to be a good start­ing point.

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