‘Sell (mostly) everything,’ investors are warned
It is the worst start to any trading year anyone can remember, says Katie Martin, and the worst for European stocks since at least the early 1970s
“Well, that escalated quickly. I mean, really, that got out of hand fast.”
The spirit of fictional journalist Ron Burgundy stalks global markets so far this year. Investors barely had enough time for a cup of tea and a “fine thanks, how was your Christmas” chat with colleagues before the wheels fell off.
Circuit breakers kicked in to suspend trading in Chinese stocks for two days in a row before authorities binned the limits altogether, fearing that they were throwing fuel on the selling pressure. Metals are in meltdown. Oil is falling faster than forecasts can keep up. The International Monetary Fund is warning that emerging markets are in a very tricky spot, and that better safety nets are needed to prevent market ructions from infecting the global system.
Even UK markets are looking shaky. Sterling has flopped to its lowest point in five-and-a-half years as investors rip up forecasts for when the Bank of England will start raising interest rates. (Did we say May? Try November.)
All told, it is the worst start to any trading year anyone can remember, and the worst for European stocks since at least the early 1970s. Last year brought the largest number of corporate debt defaults since 2009, says Standard & Poor’s, the rating agency, and this year corporate downgrades are set to far outweigh the upgrades.
Bears have their tails up. “Sell (mostly) everything,” wrote Andrew Roberts, an analyst at RBS. “My ‘severe downside for the world’ call is looking OK so far.”
One big problem here: many of the usual emergency exits are bricked up.
True to form, the yen has been attracting new fans in this time of stress. A “yen in a China shop”, to steal the term from Kit Juckes, fixed-income strategist at Société Générale.
Speculative accounts have switched to a net positive position in the Japanese currency for the first time since October 2012.
Keep going? Good luck. As several analysts have pointed out, it is probably only a matter of time before the Bank of Japan winces at the negative impact on Japanese stocks, which are already under pressure from the global malaise, and starts to scare investors off, possibly with the threat at least of more monetary easing.
OK, so the yen is juiced out, or getting there. The Swiss franc? Maybe. A rally in this currency is certainly seen as an under-appreciated risk by some investors, but with benchmark rates at -0.75 per cent and a central bank known to be hostile to currency strength, it is tough to justify. Plus, most traders are keen just to avoid the franc altogether, after the hideous surprise rally one year ago.
The dollar? It is already looking pretty punchy, and too much strength will serve only to put the Federal Reserve off its pace of interest rate rises.
Government bonds? US Treasuries are widely (if not universally) tipped for a decline, as you would expect with the Fed already raising rates. And no one wants to be the fund manager hauled up in front of an investment committee to explain why he or she piled in to German Bunds, just like last year, when we all remember the ferocity of the slide in that debt from mid-April onwards.
Gold? The yellow stuff has had a good run this year, but its once-reliable tendency to climb when markets are jumpy has unravelled somewhat in recent years.
Investors are cornered. This may help explain why some are putting money to work in bet-small, win-big highly speculative bets, like a devaluation of the Saudi riyal.
Keep the faith in more mainstream risky bets, say some. JPMorgan Asset Management, for example, says now is not the time to panic as a result of volatility, adding that we have “an attractive entry point” for annualised returns of about 10 per cent in European equities in the next five years.
That calm response may well end up as the winning strategy, but a lot of “certainties” and strong hunches have been blown out of the water already this year.
Confidence is low, and deserves to be.