The world’s major financial markets hit bottom exactly 6 years ago, on 6 March 2009. They then began their recovery, fuelled by expectations of a quick V-shaped recovery as a result of G20 stimulus plans.
At that date, prices had fallen in all markets versus their pre-Crisis peaks:
- The world’s largest Index, the US S&P 500, was down 56% , and the UK’s FTSE 100 Index was down 48%
- Germany’s DAX was down 55% and Russia’s RTS was down 77%
- Japan’s Nikkei was down 61%, and China’s Shanghai was down 64%
- India’s Sensex was down 60%, and Brazil’s Bovespa was down 49%
- Only the US 30-year government bond had risen in value, up 27%
All the markets have improved since then, but many markets saw their best moments back in the 2011-2012 period, as I noted in my last 6-monthly review in September. Since then, the world has divided into Winners and Losers, as the chart shows:
- The best result has been Germany, which has rocketed to a 43% gain versus its pre-crash high
- The European Central Bank’s decision to start Quantitative Easing has provided investors with a one-way bet
- India and the US 30-year bond have been major winners, each up 41%, as has the US S&P 500, up 32%
- The UK and Japan have also made new all-time highs in recent weeks, up 3% and 4% respectively
- But Brazil is down 32%, China is down 47% despite its recent rally, and Russia is down 64%
The collapse of 3 of the 4 BRIC nations (Brazil, Russia, China) is completely opposite to most investor and corporate expectations. Until recently, it was widely assumed that these countries would be the great winners, as their populations reached Western middle class living standards.
Today, it is clear that they have a very long road ahead to reach this goal. And India’s success is, in fact, based on a completely different expectation – namely that the new Modi government may boost the economy by providing basic facilities such as toilets.
Meanwhile, of course, debt has been rising sharply in the “winning” developed countries, due to the vast spending on stimulus policies. As I highlighted last week, Japan now has $100k of government debt per person, whilst the US has $59k, the UK $39k and Germany $36k. And at the same time, deflation is replacing inflation in the economy, meaning that the real value of this debt is rising day-by-day.
This poses a major risk to equity and bond markets, as the Great Unwinding of stimulus policies continues. Central banks have created a debt-fuelled ‘Ring of Fire’, and we will no doubt have felt many tremors (large and small) as a result, by the time my next 6-monthly update appears in September.