Bad times for global markets

By Jamie Robertson
Presenter, BBC World News

  • Published
NYSE trader

Well, there's not much argument about the last month: bad pretty much sums it up, with the euro crisis, Spain's bailout, the approaching Greek election re-run, the over-hyped and underwhelming Facebook flotation, and a flattening out of American jobless numbers.

Europe is, of course, the festering sickness at the bottom of all this.

It became pretty obvious where investors wanted to put their money when Germany offered zero-coupon bonds, which are bonds offering no rate of return, and it was 1.7 times oversubscribed. Never mind profits, what people want is security.

All round the world investors are desperate for safety and they are finding it is in short supply.

In Asia, the Chinese authorities have cut petrol and diesel prices, while investment plans and construction are to be accelerated. The commerce ministry is rolling out subsidies to spur consumption and the central bank cut interest rates for the first time since 2008.

All that sounds positive and helpful, but to many it also has a whiff of panic about it.

The US and UK equity markets were both down about 6% in May. The Nikkei lost close on to 9% and Brazil lost a similar amount.

Last refuge

One of the best indicators of the declining optimism about the big emerging economies, in particular China, has been the decline in the mining sector: the Bloomberg World Mining Index peaked at the end of January and has since fallen 22%.

Gold, which is historically the last refuge of the desperate, is 14% below its highs and - by virtue of its dismal performance - appears to have lost its safe-haven status. No refuge there, then.

The only equity market with any resilience appears to be India, but its story is hardly an inspiring one.

The Sensex started a recovery in the middle of the month and last week had its best performance this year.

Now this may seem quite strange given that growth in India has slowed to 5.3% (the first quarter was the slowest in nine years), industrial production is flat and the ratings agency Standard and Poor's has said that India could lose its investment grade status.

India's inflation rate is above 7%, about double that of China, so Delhi will find it harder to copy Beijing's stimulus measures. All the same, the consensus appears to be that the Reserve Bank of India (RBI) will throw caution to the wind on Monday and cut rates by a quarter point to 7.75%.

Cutting rates is hardly going to reduce inflation and India will pay for this with a falling currency. Indeed, it is already doing so: the rupee is down 6% against the US dollar since the beginning of May.

'Tightrope walk'

Deepak Lalwani, director for India at the investment consultancy Lalcap, says that the market already has the bad news priced in and that, when put against five-year averages, prices look pretty cheap.

As for interest rates, he explains: "The RBI is on a tightrope walk, balanced between anchoring inflation on one side and stimulating growth on the other. A lowering of rates should mark a shift to growth."

Monetary easing in Europe and the US may be closer than is generally thought. Another round of long-term refinancing operations (LTRO) from the European Central Bank, quantitative easing (QE) from the US Federal Reserve and possibly even the same from the Bank of England, may be the only short-term remedy available if the Greek elections frighten the markets enough next week.

Stephen Pope, managing partner at Spotlight Ideas, believes that even though the chairman of the Federal Reserve Ben Bernanke is luke warm on the idea, "his vice-chair Janet Yellen has been making a lot of signals that QE should be given another go, and there are others who support that view".

"Meanwhile, Obama is lashing out at easy targets and blaming the bad numbers on the problems in Europe. My guess is there will be very little done and very little growth until we get a crisis at the end of the year as they discuss the raising of the debt ceiling again."

Mr Pope explains that in the US and even in Europe there are still investments in high-grade companies with good cash positions, diversified markets and reliable dividends, but they are hard to find.

He points to the agricultural sector and soft commodities, on the grounds that "we all have to eat". It may be one of the few certainties left.

Everyone knows that the best time to invest is when things are at their worst. But what you think is the worst can so often just be bad, and bad can stay bad without getting better for a depressingly long time.