Traders call it volatile, I call it explosive
This week will not be remembered fondly by both investors and traders. Just when it seemed the world’s biggest markets have found some stability, or less volatility, a successive wave of selling hit stocks worldwide on Thursday.
Stocks began their slide during the previous night when the Shanghai Index shed just over 0.6% taking it further away from the magical 3000 index point benchmark. But it was the Hang Seng that took a real beating, losing almost 4% in a single trading session. Analysts ascribed this to a Hong Kong holiday which has just ended, but I am not so convinced. It probably was more a case of wake up and catch up. The trend on the Hang Seng has been negative since late last year and no holiday can affect this.
Across Europe the major bourses lost anything between 2.4% and 4%. Again this was not a knee-jerk reaction but only the latest in a series of downward plunges. In American markets the carnage was not as severe but impossible to ignore or to explain away citing sentiment. Midway through Thursday’s trading session, all major indices have lost more than 1% with the Dow Jones Industrial Average exceeding a 2% loss.
But the indicators to watch are the futures markets. Despite a 1.68% bounce back earlier in the week, West Texas Intermediate crude stayed under US$30 per barrel, hovering just above US$27 on Thursday after another almost one and a half percent loss in a very volatile session. Similar patterns emerged for the Dow Jones futures as well as the S&P 500 futures. In my mind futures are typically a short-term leading indicator of what will happen to spot trading later, and when these fall over, stocks follow in the wake.
Of course, all the safe haven assets attracted their share, gold jumping back to levels of more than three years ago, and US, European and Japanese debt becoming very expensive with negligible yields. It is almost impossible to figure out what drives investors when American debt yields less than 2%, German debt less than 0.2% and Japanese debt less than 0.02%.
I suspect that these negative waves in stockmarkets are driven by a strong, broad background narratives. I realise there are other considerations such as mandates, fund composition, asset classes, regulations and what not, and that investors cum shareholders’ interests must always be protected, but the losses of this week defies logic. That is why I postulate that many investment decisions (expectations) are largely driven by narratives and not by analysis or common sense.
It is fact that the Federal Reserve has flooded the world with liquidity and that this “loose” money must go somewhere, but even superficial calculations show that the amount of wealth shifting between assets classes, far outstrip the additional liquidity. So, it must be driven by something else.
It is also true that when markets “collide” (to borrow a phrase from respected economist Mohamed El-Erian), the private sector runs for the door while the (trusted) public instruments are swallowed up beyond any rational consideration. Sort of like playing the game when it is in your favour but quickly blaming the referee, or absconding, when a headwind rises.
From an African perspective, we can only watch in awe. I have stressed many times there is nothing we can do to manage these wild swings. We are powerless when the giant markets decide for or against so-called emerging economies. Going back to stricter capital controls only provide temporary relief but does much long-term damage. Suspending trade in certain capital market instruments is akin to national suicide, and trying to bolster the external value of a currency is futile in the face of the massive stampede when the market swings.
Finally, I believe the only real (long-term) protection against volatility over which one has not control, is to keep one’s own backyard clean. This means that prudent management of national finances must be far more than just a catch phrase to impress voters, or to support weak promises.
My favourite candidate in our region remains Botswana. Equally battered during the international financial crisis, Botswana bounced back fastest in the region, has a respectable growth rate, but most important, negligible government debt. Debt is what created the crisis in the first place and more debt will not paper it over.