Financial market experts expect share prices to tumble for some weeks yet with one Swiss guru predicting more serious consequences this year.This content was published on March 6, 2007 - 16:34
The Swiss Market Index (SMI), listing Switzerland's blue chip firms, slid 3.4 per cent last Tuesday and six per cent over the course of the week, destroying more than SFr60 billion ($49 billion) in share value.
The global reverse was sparked by a sudden 8.8 per cent loss on the Chinese Shanghai Composite Index a week ago - the worst fall in ten years. Markets around the world, including the SMI, followed suit and have continued to decline for a week.
While most analysts expect markets to recover from this "correction" in a few weeks, renowned Swiss commentator Marc Faber, labelled Dr Doom for swimming against the tide and current wisdom, believes this is something more serious.
"I think [share prices] will continue to go down from peak to trough in emerging markets by 20 to 30 per cent and in the developed market by 15 to 20 per cent," he told swissinfo.
The news worsens, however, as Faber predicts a rebound followed by a more serious cycle of depressed markets in months to come.
"In the second half of the year we will have deteriorating fundamentals [economic conditions such as inflation] and the markets will go lower. I think we may be at the beginning of a bear [sellers'] market.
"Knowing Swiss investors, they are heavily into shares and came into speculative markets like India and China late in the game, so I think there will be some considerable losses," he added.
Franc gains in strength
Other analysts believe the recent falls are merely correcting a recent over-inflation of markets fuelled by over-ambitious investors piling in too much cash over too short a period as they looked to make a quick profit.
Clariden Leu analyst Roger Kunz drew a parallel to the short-lived market correction in May last year.
"Last May was sparked by fears of economic overheating, but now we have the opposite fear of a slow down or recession," he told swissinfo. "The United States economy is now in a little dip but it will pick up in the second half of the year and in two or three months this will all be forgotten."
"When you look at the large numbers of destroyed value [SFr60 billion in Switzerland] it looks impressive, but this should be put into the perspective of the much larger gains made in a short period of time. We are basically where we were at last December," he added.
One effect of falling markets has been to strengthen the Swiss franc as hedge funds cease high risk speculative gambles with the currency.
Last month Swiss Business Federation chief economist Rudolf Walser warned that sudden fluctuations could damage exporters. But Johann Schneider-Ammann, president of engineering umbrella group Swissmem, told swissinfo that he was not alarmed.
"Of course exchange rates are an issue, but they are a long-term issue, and we cannot afford to act spontaneously to every development. We have done our homework as an industry and taken a profit out of the exchange rate situation overall [over the past few months]," he said.
Marc Faber warned against amateur investors taking risks with currencies.
"In Switzerland we have a lot of people who have borrowed the franc to buy property in eastern Europe. But the fastest way to go bankrupt is to borrow in low yielding currencies and invest in high yielding currencies," he said.
swissinfo, Matthew Allen
Last Tuesday the Shanghai Composite Index dropped 8.8%. In response the US Dow Jones lost 3.29% and the Nasdaq 3.86%, India's Sensex 3.8% and Germany's Dax 3.29%.
Over the next five days, Japan's Nikkei Index tumbled 8% and £111 billion (SFr261.5 billion) was wiped off London's FTSE index.
Last September, the Swiss SMI set an eight-year record high (8,413 points) and went on to break the 9,000 point barrier. On closing on Tuesday it was still riding at 8,775.60 points, up by 1.14% over Monday.
Swiss private bank Julius Bär predicts that the current correction could last as long as three months before recovering. It does not expect the SMI to dip below 8,400 points and believes it will rally to around 9,100 points by the end of the year.
Causes of the market slide
Most observers agree that the markets had overheated in recent months as investors egged on by sustained market gains took greater risks with larger sums of money.
Recent economic data from the US has also been disappointing, particularly in the mortgage sector, making investors nervous. This was agitated by former US Federal Reserve chairman Alan Greenspan commenting that a recession might be on the way.
Threats by the Chinese authorities to tighten market regulations and possibly introduce a new capital gains tax are believed to have affected the Shanghai Composite Index.
Marc Faber blames a slowdown in the expansion of the US current account and trade deficit that resulted in a large drop in market liquidity (money available to invest in the markets). Financial institutions then stopped borrowing low yielding currencies to invest in high yielding currencies (the carry trade) – which dried up another liquidity pool.
Too many people have been betting on the markets rising and have been forced to adjust their strategy, leading to a spate of selling.
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