Once again world stock markets are in the grip of herd mentality whip- saw trading losses, raising fears of a global meltdown like the one in October 1987.
Is this fear justified and are there differences between the two events, or even with the so- called Black Monday of August 2011 which witnessed the largest one-day stock market fall following the credit downgrading of the US by Standard & Poor from the coveted top tier AAA to AA+.
But on Friday 2nd February the US Dow Jones index fell 1,100 points or 4.6 percent in a wild sell off, the biggest single fall and despite some modest claw back, the market was still jittery with more falls when they opened for the new trading week.
The much-vaunted stock market rises of nearly 25 percent over 2017 credited by President Trump to his America First policy has certainly taken a beating, but White House officials are putting a brave face and saying that the economic fundamentals are different compared with previous market falls.
In this, as we will be discussed below, they are right, but in the meantime the contagion effect of the US stock market fall has spread to other global markets, justifying the old saying that when the US catches a cold, the rest of the world sneezes.
Those who advocate global interdependency learn the bitter lessons of globalization when such events unfold, as Asian, European and even Gulf stock markets registered looses ranging from around 5 percent in Japan, to around 3 percent in London, Frankfurt and Paris.
The fear of an overheated economy has led to traders and investment managers to shift assets from equity portfolios into safer interest-bearing bonds and financial instruments on the basis of higher interest ratesDr. Mohamed Ramady
In the Gulf, the Tadawul Saudi Index fell by around 1.6 percent. while the Dubai market fell by 1.53 percent, Qatar 2.11 percent and Kuwait 0.79 percent. The question is whether these falls represent a correction of over inflated equity asset bubbles or a new rout? The fundamentals are indicating that there is no fear of an economic collapse either in the US or the rest of the world, and in fact the opposite is the case with strong economic fundamentals in both the US and Asia, rising employment and investments.
In a nut shell, these same strong economic indicators are now being blamed for the fall in the stock markets around the world based on the premise that a stronger economic base would lead to higher inflation and an accelerated rise in global interest rates led by the United States central bank.
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The fear of an overheated economy has led to traders and investment managers to shift assets from equity portfolios into safer interest-bearing bonds and other financial instruments on the basis of higher interest rates coming much quicker than anticipated. In a paradoxical way, the previous US low interest rate policies adopted to stimulate the American economy led to some capital flight to higher yielding Asian markets which propped up these markets.
Some are also now worried at the credit quality of listed companies given that central banks around the world adopted aggressive asset purchase stimulus programs to support national economies and the current volatility is one indication of investors trying to differentiate between solid performing companies and those that had been technically bailed out by such central bank support.
One of the main fears of the emerging market volatility is that sharp falls and swings could be accentuated by automatic computer trading, with sell orders generated when certain stock market index levels have been reached. This was one of the prime causes of the extraordinary sharp falls during the October 1987 global stock market crash, with falls in one market then continuing into other markets in different time zones based on computer generated orders.
For the Gulf countries, the stock market upheavals around the world is also a time for reflection and assessment of the underlying strength of listed national companies and whether these are truly diversified in nature or still dependent on government fiscal support.
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A slowdown in world economies based on higher inflation, rising interest rates and a curb in employment and corporate growth could also lead to lower oil demand and put under pressure high oil price levels which have provided a lifeline for many fiscally stressed oil producers.
The erratic stock market prices of today have unleashed many interrelated issues that affect not only individual investors now wondering on whether to continue holding onto their equity portfolios or sell and invest in interest bearing securities, but also could widen fiscal deficits for some Gulf countries.
As the Chinese say, we are living in interesting times today, but in the end the whole episode could be a blessing in disguise if the current asset price bubble is realistically deflated as Trump or no Trump, no markets can sustain a 25 percent rise in value over one year and sustain this.
Dr. Mohamed Ramady is an energy economist and geo-political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia and co-author of “OPEC in a Post Shale world – where to next ?”. His latest book is on “Saudi Aramco 2030: Post IPO challenges”.