FYI | Nov 07 2008
By Chris Shaw
As State Street Global Markets put it, while voters in the US were embracing the audacity of hope by electing Barrack Obama as the 44th President of the United State of America, investors continue to embrace a gloomy view, as evidenced by the group’s Global Regime Map being at Riot Point, which is the most risk-averse level.
The group points out this is the fifth consecutive month the Map has been at this level. This leads it to suggest investors should not get carried away with the so far short rally in equity markets. The rally appears to be nothing more than a run higher within a bear market, in the group’s view and institutions appear to have largely sat out.
Part of the reason, according to State Street, is volatility levels in the market remain very high, as evidenced by the VIX (Chicago Board Options Exchange Volatility Index) trading above 40 for the 26th consecutive session. this is 1.5 times longer than the previous longest period of extreme volatility in September and October of 1998.
The bad news in terms of the risk averse position of institutional investors, in the group’s view, is that the longest period of such risk aversion in the 11-year history of the Regime Map is eight months, which coincided almost exactly with the US recession of March to November in 2001. As the US is yet to officially enter a recession in the current downturn, the group suggests it may in fact still be some time before investor sentiment recovers to anything approaching previous levels.
The news is not entirely bleak, in the group’s view, as it points out history shows when there is extreme dislocation in financial markets that causes a wholesale repatriation of funds, which is occurring in the present crisis, there is also a policy response to address the situation.
In the current crisis the authorities have indeed been very busy with bailouts and rescue packages, the latest example being multilateral action from the Federal Reserve and the International Monetary Fund (IMF) in the form of loans to Mexico, Brazil, South Korea and Singapore.
As well, central bankers have been cutting interest rates and with signs emerging the financial crisis may in fact be easing, State Street suggests there is now a chance the authorities are actually getting ahead of events. This is allowing interbank markets to return to something approaching normal levels, though it notes any improvement is coming at a very slow pace.
One remaining issue is the poor outlook for the world economy, which is evidenced by the IMF yesterday lowering its forecast for global GDP growth in 2009 to 2.2%, a result that implies advanced economies would contract by 0.3% next year. Economists have also been lowering forecasts in recent weeks, with any recovery now appearing to be delayed until 2010 at the earliest.
This is enough, in the group’s view, for fund flows from professional investors to remain at low levels, which again supports the group’s view the rally until Tuesday was nothing more than a bounce and the big investors are not yet convinced the market has bottomed.
Of note, the market is now down 46% as marked by the S&P500 Index in the US, which puts the bear market at a similar magnitude to the bear market following the bursting of the IT bubble at the end of the last decade.
