The worldwide credit crisis that burst onto investors' radar screens nearly a year ago wiped out some $3.3 trillion in wealth from global stock market wealth in the first half of this year, and optimism for a second-half recovery is fading fast.Benchmark stock indexes around the world just wrapped up their worst first half in six years or even more. For some, most notably the Dow Jones industrial average, which dropped 14.4% in the six months through June 30, it was the poorest start to a year in nearly four decades.
Even the superpowers among stock markets in emerging countries, including China and India, have not escaped the sell-off.
Investors have been dumping anything with risk - stocks, emerging market assets and corporate credits - on persistent concerns that a global slowdown will be exacerbated by quickening inflation, fueled by elevated oil and food prices, and rising interest rates. A crumbling outlook for corporate profits has recently added to the gloom.
That has left much of the world's equity markets in or near a bear market for the first time since the dot-com bubble burst at the beginning of the decade. And few are willing to say the worst is over.
“It is too early to call for a sustainable bottom,” Mohamed El-Erian, co-chief executive officer of California-based Pacific Investment Management Co, or Pimco, which oversees $812 billion in assets, said in an interview with Reuters. El-Erian has been a key voice in raising a red flag about a credit bubble for the past year
Sentiment is no better outside the United States.
“In this environment, the stress continues to be very high,” said Irene Cheung, head of Asia local markets research with ABN AMRO in Singapore. “The crunch we have seen in the past year is probably not going to go away soon.”
“We're clean out of confidence and sentiment is poor,” said David Buik of Cantor Index in London.
Since the beginning of the year, the MSCI All-World Index has fallen 11.9%, equal to a $3.3 trillion haircut. While the global benchmark is down 17% from its record close last October, it is not yet in bear market territory, typically marked by a decline of 20% of more.
Others are not so lucky. The Nasdaq composite index, down 13.6% year-to-date and off its low of the year, has been in a bear market since February. Europe's benchmark FTSEurofirst 300 ended the first half down 20.3% and has been in bear territory since January.
Asia, often touted as the new workhorse of the global economy, has fared no better. Japan's Nikkei 225, in a bear market since January, dropped 11.9% in the last six months in its worst start to a year since 1995. Hong Kong's Hang Seng is down 20.5%, its weakest beginning to a year since 1994.
None, however, rival the misery felt by mainland China investors. The Shanghai Composite has plunged 48% since the year began, the worst start to a year since at least 1992.
India, too, has been stung, with the BSE index down by just over a third in the first half.
Not even US blue chips have been spared, despite their reputations as equity safe-havens. The Dow Jones industrial average ended Monday's session near a two-year low, having racked up its worst start to a year since 1970. Just 18 index points separate it from bear market territory.
The gloom in financial markets underscores the severity of the global credit and housing crises, which began nearly one year ago.
The meltdown in the US housing market, pointed to as the key driver of the decline, has resulted in more than $400 billion of write-downs at financial institutions globally so far. The Amex Securities Broker-Dealer Index has dropped roughly 30% in the first half of the year and 40% from when credit markets began flashing crisis signals last August.
“We are in the grips of a prolonged period of deleveraging on Wall Street and we have yet to see the full impact on the financial markets of the ongoing weakness in the real economy,” said Pimco's El-Erian.
Indeed, the tightening lending standards that have resulted from the turmoil among financials come as overindebted US consumers deal with a double-whammy of falling homes values and rising gasoline and food prices.
Monday, oil prices hit a record high above $143 a barrel as mounting tensions between Iran and Israel stirred supply concerns.
The tightening of credit conditions and the decrease in consumer spending could eat into already slowing economic growth and push the United States into a recession, albeit one that might be mild yet still last longer than the eight-month recession of 2001.
But that isn't deterring investors from making money.
Chris Orndorff, who helps oversee $50 billion in assets as managing principal at Payden & Rygel Investment Management in Los Angeles, expects the Standard & Poor's 500 which closed Monday at 1,280, to drop another 5%, but he said, “I'm starting to jump in.”
Orndorff said the bottom is always difficult to nail down, but he believes financial markets are coming close to it.
“There is a lot of pessimism in the market right now and that is what we need,” he said. “We are close enough to the bottom that we are buying and if we do drop another 5%, which I am expecting, I am buying more.”
One sector he isn't dipping his toes in: financials. “The steepness of their decline is for the most part largely over, but I don't think they'll bottom out until the fourth quarter,” Orndorff said.
Peter Dixon, an economist at Commerzbank in London, goes beyond that and says he still isn't buying equities altogether.
“We're still in catching falling knife territory. It (the market) could go further down before it rebounds,” Dixon said.
“I see no upside whatsoever,” he added. “On a six-month horizon, forget it. There's no real upside in terms of the capital gain I'm going to get off equities.”
Orndorff, however, said: “That's not necessarily a bad thing...that some investors want out of equities. Bear markets lead to severe selling and lots of opportunities. I'm a buyer.” (Reuters)