September 26, 2022
18:09
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The stock market slaughter continues unabated. Investors are throwing in the towel en masse and selling everything. However, don’t rush bargain hunting just yet.
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The markets are devastated by a sell-off that is rarely seen. Since the peak of the mini-summer rally on August 15, the Belgian All Share index, containing all the shares of the Brussels stock exchange, has plummeted by a tenth. Since then just ten stocks on the Brussels price list have remained out of the red, a sign that investors are throwing it all away. Since the new year, the Belgian All Share index has fallen by 13%. The Bel20
it is doing even worse with a drop of 21% and has run into a bear market.
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The causes are gradually becoming known. Inflation remains skyrocketing, prompting central banks to fall rapidly and rapidly increase interest. The value of savings is melting like snow in the sun. Expensive energy bills, especially in Europe, are reducing purchasing power and causing the business of some companies to close. Steel production in Europe has already decreased by 13% this year. More and more signs are emerging that the eurozone is sliding into recession. It emerged on Monday that the German Ifo index, which reflects business confidence, plunged to its lowest level since May 2020.
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Eurocrash
This weighs heavily on the euro. It is still worth $ 0.965, the lowest in 20 years. The arrival of the far-right government in Italy with less pro-European positions, the single currency will not help. The collapse of the euro is also bad for inflation. Everything we import, from raw materials to American cars or Chinese knick-knacks, is getting more expensive.
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And then there is the root cause of all the misery: the war in Ukraine. The imminent annexation of four Ukrainian regions by Moscow and the threat of Russian President Vladimir Putin nuclear weapons increase fears of escalation. Fear is just the worst recipe for the stock markets.
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The essence
The MSCI World Index has fallen by a quarter from its peak earlier this year. History shows that if markets are really stormy, the downturn can be even worse.
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The European economy may already be in recession. The contagion of the economy threatens to further reduce corporate profits and therefore also share prices.
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Funds and index trackers sell stocks at any price, which can also make superior quality cheap.
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To buy in full, it is best to wait for signs that could herald a turnaround, such as a decline in inflation or a resolution in Ukraine.
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The contagion of the economy threatens to bring down corporate profits, and therefore share prices. In a harsh climate, investors are no longer willing to put high price-earnings ratios on the table for equities. An example illustrates the impact. Suppose Company A makes a profit of $ 5 per share and the market is willing to pay 20 times that profit, then you come up with a share price of $ 100. If the profit drops to $ 4 and the market only wants to put that profit on the table 15 times, the price barely drops $ 60. So 40 percent less.
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Rothschild
Legendary banker Nathan Mayer Rothschild already knew how to make a profit on the stock market: ‘Buy with gunfire. Sell on the ring! ‘ But do prices already take the changed circumstances sufficiently into account? We don’t know how severe the recession will be or how long it will last. The past shows that prices can drop much harder if the markets really storm. At the start of the corona pandemic, the MSCI World Index lost 34%. The 2008 financial crisis brought the world stock market to just under 60 percent, the dotcom crisis over 50 percent. The stock market fell more than corporate earnings in all circumstances. So far, the decline in earnings in the MSCI World is still limited, the index has already lost 25%.
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The stock market always exaggerates upwards and downwards. This is partly due to the large weight of funds and index trackers. If their owners sell it, the managers are obliged to download the shares at any price, regardless of the quality of the companies. the invisible decline in Belgian real estate shares partly it has to do with this. Traders told us that big investors are drastically reducing their exposure to the real estate sector due to rising interest rates, selling funds and trackers. Belgian members of EPRA real estate indices such as WDP
Construction
of retail properties
they are more affected than stocks that are not in those stellar funds, like WEB
of Texas
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Buyers are on strike
In turbulent times, a buyer’s strike often occurs. There are, of course, always as many buyers as there are sellers on the stock exchange, but buyers become very austere with their buying limits. Large orders therefore cause fierce downward movements. These are reinforced by the behavior of hedge funds. Many of these funds go short by selling stocks they don’t own, hoping to buy them back at a lower price later. In a bear market, this is one of the few ways to make money.
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Unfortunately, a cheap stock market by itself is never a reason to start a recovery.
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The mechanisms are self-reinforcing and can cause prices to drop deeply. At some point, stocks go cheap. Unfortunately, a cheap stock market by itself is never a reason to start a recovery. This usually requires a trigger. A clear rise in inflation could herald a turnaround, just like a miracle in Ukraine. Or the central banks that are less restrained, even if this is likely to happen only if inflation moderates, perhaps due to the change of gear of the economy. According to American professor Jeremy Siegel, this will happen sooner than central bankers think. “They didn’t see inflation coming, the same thing is happening now with impending deflation,” he told CNBC in a fierce criticism of the Federal Reserve.
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Cash
When stocks without company specific news are penalized as the market corrects, opportunities open up for long-term investors with liquidity on the sidelines. Occasionally, even high-quality companies drop to absurdly low levels. We’re not there yet, but it’s worth making a list of potential buyers and looking for signs that could herald a turnaround.
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Since you never know what stage the stock market correction is in, care remains to be taken. The risks are still too great to be bought outright. But anyone who has been on the stock market for a long time knows that even this misery will one day be fine, unless perhaps like Vladimir Putin he turns to nuclear weapons. There are also positive points here and there, such as falling oil and metal prices that could help tame the specter of inflation. Natural gas remains very expensive, but the price is firm halved from the peak of August. If the gas price normalizes, equity markets could accelerate.
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