by Ambrose Evans-Pritchard, International Business Editor
Telegraph.co.uk
Three-month slide could hit record lows, Royal Bank of Scotland chief
credit strategist Bob Janjuah predicts.
Britain’s Uber-bear is growling again. After predicting a torrid “relief
rally” over the early summer, Bob Janjuah at Royal Bank of Scotland is
advising clients to take profits in global equity and commodity markets and
prepare for another storm as winter nears. …
“We are now in the middle of a parabolic spike up,” he said in his
latest confidential note to clients.
“I expect this risk rally to continue into – and maybe through – a large
part of August. What happens after that? The next ugly leg of the bear
market begins as we get into the July through September ‘tipping zone’,
driven by the failure of the data to validate the V (shaped recovery) that
is now fully priced into markets.”
The key indicators to watch are business spending on equipment (Capex),
incomes, jobs, and profits. Only a “surge higher” in these gauges
can justify current asset prices. Results that are merely “less bad”
will not suffice.
He expects global stock markets to test their March lows, and probably worse.
The slide could last three months. “A move to new lows is highly likely,”
he said.
Mr Janjuah, RBS’s chief credit strategist, has a loyal following in the City.
He was one of the very few analysts to speak out early about the dangerous
excesses of the credit bubble. He then made waves in the summer of 2008 by
issuing a global crash alert, giving warning that a “very nasty period
is soon to be upon us” as – indeed it was. Lehman Brothers and AIG
imploded weeks later.
This time he expects the S&P 500 index of US equities to reach the “mid
500s”, almost halving from current levels near 1000. Such a fall would
take London’s FTSE 100 to around 2,500. The iTraxx Crossover index measuring
spreads on low-grade European debt will double to 1250.
Mr Janjuah advises investors to seek safety in 10-year German bonds in late
August or early September.
While media headlines have played up the short-term bounce of corporate
earnings, Mr Janjuah said this is a statistical illusion. Profits were in
reality down 20pc in the second quarter from the year before. They cannot
rise much as the West slowly purges debt and adjusts to record
over-capacity. “Investors are again being sucked back into the game
where ‘markets make opinions’, where ‘excess liquidity’ is the driving
investment rationale.
“The last two Augusts proved to be pivotal turning points: August 2007
being the proverbial ‘head-fake’ when everyone wanted to believe that
policy-makers had seen off the credit disaster at the pass, and August 2008
being the calm before the utter collapse of Sept/Oct/Nov… 3rd time lucky
anyone?”
The elephant in the room is the spiralling public debt as private losses are
shifted on to the taxpayer, especially in Britain and America. “Ask
yourself this: who bails out Government after they have bailed out everyone?”
Mr Janjuah said governments might put off the day of reckoning into the middle
of next year if they resort to another shot of stimulus, but that would
store yet further problems. “If what I fear plays out then I will have
to concede that the lunatics who ran the asylum pretty much into the ground
last year are back in control.”
Over at Morgan Stanley, equity guru Teun Draaisma thinks we are through the
worst. “We were on course for a Great Depression in February, but
Armageddon was avoided. Governments did not repeat the policy errors of the
1930s.”
“We have seen the lows of this crisis. This is a genuine rebound rally,
and it has been short by historical standards so far,” he said.
Mr Draaisma, who called the top of the bull market almost to the day in
mid-2007, has crunched the worldwide data on 19 major stock market crashes
over the last century. They show that the typical rebound rally (as opposed
to bear trap rallies, when markets later plunge to new lows) lasts 17 months
and stocks rise 71pc. The 1993 rally in the US was 170pc over 13 months.
Finland’s rally in 1994 was 295pc. Hong Kong rallied 159pc in 2000. This
rebound is only five months old. The key indexes have risen 49pc in the US
and 42pc in Europe. Mr Draaisma advises clients to stay in the stocks for
now, but stick to telecom companies, utilities, and oil.
Yet he too expects a nasty correction once this rally falters. The usual
trigger at this stage of the cycle is when central bankers start to make
hawkish noises, typically a couple of months before the first turn of the
screw (normally a rate rise, but in this case an end to “quantitative
easing”. “As long as policy-makers are talking about how fragile
the recovery is, equities are unlikely to go down much.”
This moment can be hard to judge. There has already been rumbling from some
governors at the US Federal Reserve and from the European Central Bank’s
Jean-Claude Trichet. Markets are pricing in rates rises by early next year.
The pattern after major financial bust-ups is that the rebound rally gives way
to another fall of 25pc or so, lasting a year, followed by five years of
hard slog as stocks bounce up and down in a trading range, going nowhere. Mr
Draaisma suggests taking a close look at the chart of Japan’s Nikkei index
from 1991 to 1999. Gains were zero.
We are in uncharted waters, however. Monetary and fiscal stimulus has been
unprecedented. Russell Napier at Hong Kong brokers CLSA says a powerful bull
market is already taking shape as the American giant reawakens. Perma-bears
will be left behind. He said: “It is dangerous to be in cash.”
When the finest minds in the business disagree so starkly, the rest of us can
only shake our heads in confusion.