Another thing I don’t like is saying “I told you so!”. In line with my ongoing research, global markets have slipped somewhat over the past few weeks. For the month of September, the largest IMA Sector fall was seen by Global Emerging Markets at -4.3%. Over the past fortnight, the FTSE100 itself has fallen by 4.6%.
I continue to see that stocks remain overpriced amid the latest news from Eurozone powerhouse, Germany, where industrial output seems to be grinding to an inexorable halt. The IMF has also started to see that maybe its growth predictions were a little bit overcooked, leading to forecasts being cut.
It (the IMF) has stopped short of congratulating the UK and USA on their apparent strength and resistance to an otherwise gloomy World picture. There would appear to be an ever increasing school of thought which forecasts doom, in particular for those economies where the level of debt compared to GDP is actually being increased.
China, in particular, has increased borrowing dramatically ever since the credit crunch first started from 140% of GDP to 220% today. To some economies, this can be viewed as easily affordable and nothing to get worried about. But for countries like Italy, the time is fast approaching where it may have to go “cap in hand” to the ECB. After that, I don’t really want to dwell too much on what impact that would have in terms of global contagion.
Anyone sceptical about the supposed merits of paying down your debt sooner rather than later would do well to pay close attention to what transpires over the next year or so.
In simple terms, if you lend some money to a friend and the friend pays you back, you wouldn’t think twice about lending them money again in future if they asked. The problems start when the friend can’t pay you back. You’d probably refuse to lend that friend anything else in future.
Similarly, countries around the World dangerously close to default may find that it becomes impossible to get anyone to lend them any more money, causing an “about turn” in economic growth and future prospects. This realisation may be dawning on the markets and the unthinkable potential outcome may be a factor in why prices have dropped recently.
Both the UK and USA appear better positioned because of their tighter fiscal policies, so it would definitely be a defensive move to have equities nowhere else until this scenario has played out some more.