“This is a day for doing nothing. You don’t need to turn off the computer and go to the beach, but it’s the type of day where every action you take might lead to a loss,” said one of the most senior fund managers in Israel on Sunday, when asked what he is recommending to his clients.
The steep losses on the Tel Aviv Stock Exchange on Sunday and Monday – between 4% to 5% on each of the two days for the leading indices – marked one of the most painful trading sessions in recent times. On Tuesday, the major indexes of the TASE went up, with the Tel Aviv 25 up 2.3%, Tel Aviv 100 up 2.6%, Tel Aviv 75 up 4.1%. Still, it is important to understand that the use of the word “painful” in reference to the previous two days is not just symbolic. That is actually what investors feel when they see the losses in their investment portfolios: a real pain.
The 8% drop in the benchmark TA-25 index over the last two days is pretty steep by the standards of the last 15 years. Drops of 4%, 5% and 6% have occurred 19 times since the year 2000 on the TASE, but never in back-to-back sessions like we’ve seen this week. Only twice did a single day’s decline come close to matching this week’s declines – and that was in 2000, at the start of the second intifada, the bursting tech bubble and the onset of a very steep recession.
The official trigger for the fall of the markets was the shrinking industrial production figures from China, which in recent years has become the locomotive pulling the Western economies out of the mud of recession. In practice, China has become the benchmark for global economic growth. Now, with the drop in production, it means the Chinese economy will grow less than forecast, which had immediate repercussions for global commodity prices.
A drop in Chinese economic growth means less demand for raw materials from the country that has become the world’s factory. It’s no surprise that oil prices are at their lowest in more than six years, but the same goes for a lot of less widely followed commodities.
Gold was the refuge for a sizable number of investors with short memories. Consequently, the price of gold rose last week by about 4%, reaching $1,159 per ounce. For those who don’t remember and think gold is a safe haven, we must remind you that, toward the end of 2011, gold was selling at a price of $1,889 an ounce. In other words, whoever bought the precious metal back then has lost 38% of their money. That’s why gold may be seen by many as a safe harbor in troubled times, but in reality it is no more than another speculative investment.
The slowdown in Chinese economic growth will also affect world economic growth in general. This means that all these growth stocks, such as high-tech and telecommunications companies, are already much less attractive. That’s why the TASE’s BlueTech and Technology indexes found themselves reacting with even steeper losses than the broader leading indexes. Only the bank share indices, the mid- and small caps, and the Biomed Index fell more than technology shares.
The real drama is in bonds
The losses on the stock markets are hiding the true drama, which is in the bond markets. In June and July, billions of shekels were withdrawn from mutual funds specializing in government bonds due to their low yields.
Quite a few fund managers who kept their portfolios balanced with bonds – meaning they didn’t have overly short or overly long maturities – were those who suffered the majority of the withdrawals. Investors rushed to increase their risk, bought stocks and invested in so-called 30/70 bond funds, which have a 30% weighting in stocks and the rest in bonds. This is how these investors planned to compensate themselves for the almost zero yields on bonds.
But sometimes in the markets, it is more important not to lose money than to try and make money: low or even zero yields are better than an adventure in stocks that leads to a capital loss. These same investors who rushed to flee bonds and increase their risk exposure far beyond what their stomachs could handle are now discovering the bitter truth – namely, that risks have a tendency of turning into reality.
It is worth putting the blow investors have suffered over the past few days into long-term proportion. The present losses have come after almost continuous gains in the last four to six years, during which time the stock indices, fueled by almost 0% interest rates, climbed by 135% to 165%. Right now, most stock indexes are only 10% or so lower than their all-time highs.
It’s hard to forecast the depth of the Chinese economic crisis, and whether recent government actions there – such as devaluing the yuan and halting trading in some 50% of shares – will help calm investors. Alternatively, they may just be a smokescreen for the bitter truth that the Chinese economy is slowing down faster than its leaders are prepared to admit. Whoever is willing to halt trading when the market trends are not to their liking, could very well not be very willing to ensure accurate reporting of national economic data.
A number of investment managers have said in recent days that this is not a crisis, merely a correction. It is worth taking such declarations with a grain or two of salt. Investment managers tend to be in one of two types of mood: optimistic or silent. Pessimistic investment managers will find it difficult to attract money and take their share in management fees.
In the spirit of the old saying in the markets, in which stock market drops do not end until the last of the optimists have disappeared, it seems we are only at the very beginning.
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