| Analysts divided on likelihood of bear market - global rally or Black Monday? |
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| The jury is out on whether or not global equities are at the start of a bear market. Financial analysts responding to the question in this issue have different forecasts, with one proposing global equities will rally by year-end, (although he maintains that Irish equities are predicted to under-perform their European peers); and another identifying many similarities between today's market conditions, and those of ‘Black Monday’, in October 1987. |
The recent downturn in global equity markets has divided analysts over whether the markets are at the beginning of a bear cycle, or whether it’s a case of the old adage, ‘sell in May and go away’. Alan McQuaid, chief economist at Bloxham Stockbrokers, and Ciaran Kane, head of treasury at Barclays Capital, see different sides of the coin in regards to factors, such as rising inflation, a possible dollar crisis and the possibility that interest rates will top out at benign levels, pertaining to the start (or not) of a bear cycle. | | Bull and bear statues in front of the Frankfurt Stock Exchange |
McQuaid says, ‘there is no doubt that core CPI in the US is a concern for the markets.’ He says, however, that by looking at the the diffusion index (based on the percentage of 41 CPI categories with accelerating minus decelerating inflation,) ‘most of the components that make up the price index are actually falling.’ McQuaid says that this index ‘leads the key measures of consumer price inflation’ and based on this ‘ inflation is in a peaking process.’
Judging from what he says, McQuaid believes the markets are just going through a correction and says that, ‘the world economy remains too flexible, too productive and too integrated to allow inflation to seriously take hold, and monetary conditions are still supportive enough around the globe to prevent any major slump.’ He says equities will be pressurised for a while, but ‘lower bond yields and confirmation that inflation is not a major problem, should enable equities to rally again in the latter part of the year.’
Although McQuaid proposes that while inflation may not be a concern worldwide, it could be in Ireland, and he believes that both ‘Irish equities and government bonds will under-perform their respective Eurozone benchmarks over the remainder of this year.’
Kane on the other hand sees the sell-off in the markets as a significant deviation in market behaviour since 2002. He told FINANCE, ‘the sell off in risky and cyclical assets over the last ten days may be different to previous ones in the last three years, to the extent that inflation concerns are more real and the trade-off between inflation and growth more binding. We have identified a number of similarities between current market conditions and those prevailing before the stock market crash in October 1987, and we are not ruling out the possibility that we will experience a similar outcome’.
Unlike previous episodes since 2003, the recent market correction is different in two important ways, argues Kane. He says that inflation risks are now more real due to less spare capacity in the US economy, and there is more of a binding trade off between inflation and growth, in that inflationary pressures in the US will lead to further tightening by the Fed, lower future growth.
Kane believes these conditions are similar to those leading up to the crash in October 1987, and he is ‘not ruling out the possibility’ of a ‘similar outcome.’ Other similarities according to Kane include, ‘steady deterioration in the US current account, tight monetary policy accompanied by an acceleration in inflation, strong rallies in stock markets and a new Federal Reserve Chairman’. |
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| Article appeared in the May 2006 issue.
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