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Hoang Quoc Anh
Hoang Quoc Anh
Articles (281)  | Author's Website |

Should We Worry About Another 2008 Crash?

The market is facing many challenges it hasn't seen before

February 26, 2016

The stock market has been quite volatile so far this year. The S&P 500 has dropped from 2043 to only 1829 in the middle of February, then climbed to nearly 1960 at the time of this writing. With the plunge in commodity prices, especially oil along with many unstable events in the world, investors have been worrying about another global financial crisis like the one in 2008. If we got into a similar situation from 2008, the financial world would fall apart and the domino effects will influence the whole global financial system in a very negative way.

The world is facing a lot of challenges, including things we have never experienced before. First, several large central banks have imposed negative interest rates in order to boost their economies, including the European Union, Switzerland, Denmark and Japan. The European Central Bank and Japan has used negative rates to fuel growth and raise inflation, while negative rates would help Denmark and Switzerland prevent their currencies from increasing in value too much.

Second, commodity prices have been falling sharply, especially oil. In most businesses, lower oil prices means lower expenses, which boosts the business’ productivity and profitability. According to Byron Wien, vice chairman of Blackstone Advisory Partners, around 50% of the money saved at the pump was spent elsewhere as “consumers paid down debt with, or banked, the other half.” He mentioned that because of low oil price, the total rig count has dropped by as much as 70%, damaging the financial health of exploration and development companies. That leads to the collapse of those companies’ bonds, causing the financial conditions of major banks/institutions that fund the energy industry to worsen. When the major banks’ health is in question, global financial stocks would be affected negatively. Wien wrote: “In Germany, Deutsche Bank stepped in to buy $5.4 billion of its bonds to prove its financial condition was 'rock solid.' Still, investors expected some of the major established energy companies to cut their dividends."

Third, global investors are worrying about China. Wien said that the negative view was formed by data on exports, imports of raw materials, electricity consumption, retail sales and capital spending. We all know that China’s growth has been stimulated by the investment into infrastructure. As debt that funded those projects has reached unsustainable levels, non-performing loans would increase dramatically. According to Wien, China should focus on stimulate consumer spending domestically to maintain growth. Wien felt optimistic about China’s economy as he saw the process was underway, China’s economy is rebalancing. China still creates more than 10 million jobs annually, moving people from the countryside into urban areas.

In the U.S., however, the economic environment is generally positive. Wien mentioned that the employment situation is encouraging. “Over the past twelve months, the average monthly increase has been 225,000… In January, the participation rate increased to 62.7% from 62.4%. Payroll employment is well above the 2007 peak.”

Apart from employment, housing is also positive. While house prices jumped by 7.7% year-over-year in December, mortgage rates are in the low range of 3.5%. For the stock market, Wien thought that the current multiple of 15.5 to 16 of the S&P 500 was in line with the historical average. With the market oversold and the level of pessimism comparable to 2012, not 2009, we are not seeing the crisis like the one in 2008.

Howard Marks (Trades, Portfolio), chairman of Oaktree Capital Management, also has the same view. He also doesn’t expect a similar crash like 2008. First, we haven’t been in a boom of both economy and stock market. Moreover, the leverage in the private sector has been declining. The banks’ leverage ratio has significantly reduced, from 30 times equity to very low double digits today. Last but not least, the 2008 collapse was due to subprime mortgages. “This time around I see no analog to sub-prime mortgages and MBS in terms of their combination of fragility and magnitude," Marks said.

Indeed, there might be plenty of things to worry about. But I don’t think the situation is as bad as the 2008 crash. Investors might not to worry, however, we should have some cash reserves to jump at any near-term opportunities when another market correction occurs.

About the author:

Hoang Quoc Anh
Chief investment strategist for the Global Hidden Gems Portfolio (https://ghginvest.com). Searching around the world for stocks that trade below net cash but are still profitable.

Visit Hoang Quoc Anh's Website

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