KATHY SWAN: This is the year of the firey pig. According to Chinese tradition, it will be a volatile 12 months, but the good news is, such a year only comes along once every six decades. That's probably small comfort to any Chinese horoscope watching investor caught up in the global share market shake up sparked off by China this week.
Shanghai's 9 per cent sell off on Tuesday soon startled Japan and other Asian markets; the panic then spread to Europe.
Billions of dollars were wiped even before the frenzy reached New York, and Wall Street traders were spooked. Wall Street's bluechip industrial index, the Dow Jones, lost more than 3 per cent, and the general angst of so much money being wiped out was not helped by computer glitches, as technology struggled to keep pace with the pandemonium.
GERARD MINACK, MORGAN STANLEY: I think it's been a shot across the bows to speculators after what had been, particularly in the States, and almost record run of correction free up strength for equity markets. We've gone a very long time without even a minor set back on Wall Street, or on the Australian market. So for now let's just call it a hiccough, if you will.
KATHY SWAN: Morgan Stanley equity strategist, Gerard Minack, isn't alone in saying that while Tuesday there, Wednesday here was tumultuous, it wasn't a correction and it wasn't unexpected.
GERARD MINACK: It's like lightning; we know all the mechanics behind lightning, but we still can't predict where it's going to strike.
KATHY SWAN: The China led sell off certainly put an abrupt end to the almost daily succession of leaps in record territory which powered Australian markets beyond the rarefied altitude of 6,000 points. For all the dizzying decline, it's just knocked off February's gains. The Shanghai Composite Index had a giddier fall, which could be the steadying slap it needs, according to Deutsche Bank's Peter Richardson.
PETER RICHARDON, DEUTSCHE BANK: We think the magnitude of the fall that we saw probably does reflect excess valuations, and certainly if you compare valuations between the Hong Kong market and the domestic Chinese market for the same stocks, there were clearly some quite considerable anomalies there.
KATHY SWAN: But it's not that the ball was just in China's shop.
GERARD MINACK: We can look back and we say, "Oh, it started in China," or we can say it was those comments from Alan Greenspan, but I'm not convinced. I mean, the end of the day we've had other events that plausibly could have been triggers over the last six months.
KATHY SWAN: Whatever the trigger, on the Australian market the big miners were shot down most brutally.
PETER RICHARDSON: Maybe the fall in the Chinese equity market did reflect an impact on, or a potential impact on the growth outlook. I think, secondly, this coincided also with some weak US data which did raise the risk that investors might have to consider a recessionary outlook in the US. We don't agree with that, but certainly there was that concern.
KATHY SWAN: On top of that, talk of a big new tax on windfall profits for miners in South Africa didn't helped the sentiment for Rio and BHP, and at home there has been a growing sense of the need to reconsider risk and cool the market. Citigroup's James Rosenberg.
JAMES ROSENBERG, CITIGROUP: The rubber band has stretched reasonably aggressively over the last couple of years, and particularly this financial year because of excess liquidity, a lot of money going into superannuation. That has seen prices rise more than earnings, but not dramatically.
KATHY SWAN: And super money just keeps coming. Citigroup research estimates more than $30 billion will flood in this year, compared to a trickling 6 billion three years ago. That's as private equity keeps pumping the market with rising debt that could, in a worst case scenario, have a very dramatic impact.
GERARD MINACK: It will effectively be an environment where we have what I call "triple layered leverage". We have leveraged investors, who are leveraged corporates who depend on leveraged consumers for their money, and if we get to that house of cards, if it tips over then we could have a really bleak, bare market.
KATHY SWAN: The big name leveraged buyouts, like Qantas or Coles, are also attracting small investors who may not realise they're exposed to high risk, while the institutions stay in the bunker.
PAUL DRAFFIN, STANDARD & POORS: There is a lot of talk about the major financial institutions being key lended into these transactions. But what we're actually seeing is that they're taking the lower risk components of the capital structure in these transactions.
KATHY SWAN: And Standard & Poors credit analyst, Paul Draffin, says that's okay only as long as debt stays cheap.
PAUL DRAFFIN: Whilst it may seem attractive in the current credit environment, where credit spreads are quite low, that can change very quickly as credit market conditions change.
KATHY SWAN: Thanks to this week's global dominos, factoring in risk may make a welcome return.
PETER RICHARDSON: I think it is healthy to see a degree of risk pricing put back into equity valuations. The fact that we haven't seen a similar magnitude of fall in most commodity markets suggests that the underlying outlook is good.
JAMES ROSENBERG: In terms of benchmarking the overall market to our estimation of fair value, given current bond yields, we're probably about one standard deviation off fair value. In 1987, when the market peaked before the big crash, the market got to six standard deviations.
GERARD MINACK: I think the ASX 200 can get down to 3,000 points in 2010, and, yes, that means I do think the market can halve.
KATHY SWAN: While the just completed reporting season has delivered stronger than expected results overall, it will be another six months before what, if any, damage from this week might start to be seen. - © 2007 Australian Broadcasting Corporation
Posted March 9th, 2007 by Armen Hareyan
