‘The risk of a meltdown is growing’

IT’S going to be a “cataclysmic” year. A jittery stock market and China fears are pushing the world to the brink of another crisis.

WILL 2016 be the year of the next great financial crisis?

As the Aussie stock market struggles through its worst start to a year ever and faces the prospect of its worst losing streak since 2008 if it closes in negative territory again today, economists are sounding alarm bells.

The S&P/ASX 200 has lost more than $100 billion in value in the first eight trading sessions of the year, sparked by growing fears about the underlying strength of China’s economy.

A leading UK economist has joined the Royal Bank of Scotland’s “sell everything” call in warning of a new financial crash prompted by the oil price collapse and deflation in emerging markets.

The Guardian reports Albert Edwards, strategist at the Société Générale bank, told an investment conference in London that the west was about to be hit with a wave of deflation from emerging market economies and central banks were blind to the looming disaster.

“Developments in the global economy will push the US back into recession,” he said. “The financial crisis will reawaken. It will be every bit as bad as in 2008-09 and it will turn very ugly indeed.

“Can it get any worse? Of course it can. Emerging market currencies are still in free fall. The US corporate sector is being crushed by the appreciation of the dollar.”

Mr Edwards said the US economy was in far worse shape than its central bank realised. “We have seen massive credit expansion in the US,” he said. “This is not for real economic activity; it is borrowing to finance share buybacks.”

Yesterday, the RBS advised clients to brace for a “cataclysmic year”, with its credit team advising clients that a global deflationary crisis is about to hit, The Telegraph reported. RBS warned global stock markets could fall by one fifth and oil could fall to as low as $US16 a barrel.

“Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small,” RBS credit chief Andrew Roberts reportedly said in a client note.

“China has set off a major correction and it is going to snowball. Equities and credit have become very dangerous.”

Investment bank Credit Lyonnais Securities Asia (CLSA) has joined the calls, warning Australian clients to “sell any strength in the first quarter of 2016” on the basis of advice from its technical analyst Laurence Balanco.

“Larry was expecting a final round of selective gains in early 2016, but the dramatic change in developed markets’ character, coupled with the continued breakdown in ‘oversold’ commodity and commodity-related markets/sectors, now makes this an unlikely scenario — the risk of a meltdown is growing,” CLSA said today.

“He maintains his call to sell any strength in 1Q. On the ASX 200, a clear trading range has formed off the October and December 2015 lows between 4,909-4,918 and 5,325-5,384 … a break below this range would be bearish, opening the door for further weakness down to the 4,500 area, just above the October 2011 and May 2012 highs.”

Conversely, Victor Fang, Associate Professor at the Deakin University Business School, has warned mum-and-dad investors to “hang in there” and ride out the current cycle of fear and over-reaction as panic selling continues.

“For as long as uncertainty and fear rule global equity markets, the rollercoaster ride will continue for Australian investors,” he said.

“But the core fundamentals haven’t changed, so mum-and-dad investors should hang in there and see through this period of uncertainty and diminished confidence — don’t just sell for the sake of it.”

Associate Professor Fang blamed the volatility on China’s misguided attempt to intervene in its falling market. “China’s market intervention — to suspend the trading of shares in companies which have fallen five per cent — is only increasing selling pressure,” he said.

“In a slowing Chinese economy, such circuit breakers send a signal to investors that something is not right and that adds to the fear and anxiety.

“China aside, the Greece debt problem has not been solved and the refugee crisis gripping Europe will put more pressure on national economies already under a great deal of pressure.”

AMP Capital chief economist Dr Shane Oliver has also warned investors not to be too concerned. “In the absence of US/global recession, which still seems unlikely, it’s hard to see a GFC style bear market,” he wrote in a client note today.

“The key for investors is to recognise that shares offer a higher return potential after sharp falls, selling after big declines just locks in a loss and that dividend income from a well-diversified portfolio is little affected by share market volatility.”

Dr Oliver conceded there was a “lot of pessimism around”. “This is evident in headlines screaming ‘RBS tells investors to sell everything’ to ‘Collapse 2016’. Then again you might say such extreme views always exist. True,” he writes.

“But they are suddenly all landing in my inbox telling me that such headlines are getting much more interest and belief. In some ways this is a negative as it is creating more fear amongst investors, but the flip side though is that when everyone fears the worst, often the surprise is that things turn out to be better.”

People wait to cross a street in front of an electronic stock indicator of a securities firm in Tokyo. (AP Photo/Shizuo Kambayashi)

AUSSIE MARKET RALLIES ON CHINA DATA

The Australian share market has extended its early gains to be more than 1 per cent higher by 3:00pm AEDT, as better-than-expected China trade figures spurred investor confidence.

China’s December imports and exports shrank but the decline was smaller than November’s in a positive sign for lacklustre economic growth.

Customs data on Wednesday showed exports declined 1.4 per cent from a year earlier to $224.1 billion, an improvement over the previous month’s 6.8 per cent contraction. Imports were down 7.6 per cent at $164 billion, a smaller loss than November’s 8.7 per cent fall.

China’s trade data reflect weak global demand and a decline in domestic economic growth.

Economic growth fell to a six-year low of 6.9 per cent in the quarter ending in September, but economists say they see signs of improvement in the final three months of the year.

The data extended an earlier rally. At midday, retailers were leading the way, up 1.3 per cent, while the big miners were again dragging their heels, down 0.67 per cent as a sector.

The Reject Shop had found 27 cents to $10.58 at noon while the world’s biggest miner BHP Billiton had shed 27 cents to $14.74. Australia’s biggest gold miner Newcrest, was off by 44.5 cents to $12.755.

Wall Street finished a volatile session overnight up by 0.72 per cent.

Locally, investors will be looking to Thursday’s December jobs print, with most expecting a slight rise in the unemployment rate.

The Australian share market was higher in early trade as a stronger banking sector outweighs weakness among mining stocks.

IG market strategist Angus Nicholson said expectations of some stability in the Chinese yuan and on the Chinese share market has resulted in a positive start for the local bourse, which has closed lower for the past eight sessions.

“It looks like we’re going to have a pretty good day on the ASX so far,” Mr Nicholson said.

“Of course, what happens in China at 12.15pm and 12.30pm when we get the currency fix and the cash market open will have a lot of bearing on how we trade through the rest of the day.” China’s recent moves to, first, devalue its currency to make it more competitive, and then to strengthen it, has raised concern over whether its government can control the economy and has generated volatility on world markets.

Mr Nicholson said a lift in China stocks on Tuesday was interpreted as a sign the Chinese government was getting some of the ructions in currency and equity markets under control.