Many sides to a likely correction
The global financial markets continued their winning streak in 2017, whereby they reached levels that were greatly inflated. Part of it could be the natural result of improvements across some economies, especially the emerging markets of Asian, and also through speculative factors to achieve quick profits.
It is against this backdrop that some market watchers are issuing warnings about the possibility of a painful correction happening this year, particularly after stock prices touched levels without any solid foundation to support such increases.
The rating agency Standard & Poor’s warned last week about a downgrade for the US due to the surge in public debt, and which is seemingly out of control. Furthermore, there is news that China may sell part of its holdings in US Treasuries.
Although China has denied that, the world’s financial markets have taken such news seriously, meaning that in both cases, the result will be a negative and affect investors’ confidence in the US financial market.
And because the US economy is the largest globally, the anticipated correction will definitely result in repercussions for all financial markets and may lead to an unravelling of the recent growth spurts those economies were experiencing.
First, to see a wholesale change could be the overvaluation in stock prices and the second is higher interest rates. It would be interesting to see what this would mean for the dollar, with the US likely to see three rate hikes. It should lead to a major restructuring for investment portfolios.
Cycle of fluctuations
Third, a correction could set off a new cycle of market fluctuations, and a fourth one could see the real estate sector seeing a further spike in inward investments.
A fifth could be to see more geopolitical tensions this year, prompting investors to seek less risky channels, particularly gold, which could see gains in the coming period. Sixth, proposed IPOs might need a rethink on prices, particularly the Saudi Aramco offering, which will be the largest stock offering in history and expected to reach $100 billion. It could lead to heavy asset liquidation to contribute to these subscriptions.
All these factors indicate that a correction in the global financial markets is inevitable. Yet, it is difficult to predict the extent and disparities between each country, as that will depend on many factors including the economic situation, the liquidity available, and the level of speculative activity.
With regard to this region, the recent upturn in oil prices, and which is expected to continue, will provide additional liquidity and help alleviate any upcoming correction. This is despite the fact that many listed companies and businesses were affected by the decline in oil prices since mid-2014.
The global economy will see a major capital restructuring, which will provide opportunities for more success. It would also lead to losses for some investors, a natural outcome in the world of finance.