Carnage, bloodbath, meltdown, massive sell-off, freefall! These are the words used to describe what transpired to global markets this past three weeks. Share prices tumbled again as global recession fears, European debt concerns and banking problems spooked investors anew. Meanwhile, gold set a new record high and US treasury yields fell to record lows as the massive exodus from risk assets led investors scrambling towards these safe havens.
For US & European investors, it is beginning to feel like the 2008 credit crisis all over again. For Asian investors, it is reminiscent of the 1997 Asian financial crisis.
The worst three weeks since the Lehman collapse
Developments the last few weeks have significantly altered the monetary landscape in both the US and the European Union (EU). Fears of a double dip recession in the US had prompted the Fed to commit to holding interest rates near zero up to mid-2013. Meanwhile, the ECB has been making loans to troubled EU banks and has expanded its purchases of risky sovereign debt to arrest a brewing debt crisis contagion.
Despite the Fed’s and ECB’s efforts, markets continued to panic, registering its worst three weeks since the time of the Lehman Brothers’ collapse in 2008. A spate of negative economic news in the US such as the collapse in Consumer Confidence and the Philadelphia Fed Business Outlook Survey (which fell to recession levels) further aggravated the negative mood.
European banks get slaughtered
Just like what happened during the 1997 Asian financial crisis (where Asian banks lost 50 percent to 80 percent of their values) European banks are now bearing the brunt of the European sovereign debt crisis. Ironically, European banks are now saddled with risky sovereign debts which were used to bail them out three years ago.
Based on the Bloomberg Index of European banks and financial services stocks, the sector is down 25 percent in less than a month and has now given up 70 percent of its gains off the March 2009 lows.
From TIP to PIIGS
What is happening in Europe now is reminiscent of what happened in Asia during the 1997 Asian financial crisis. Both the 1997 Asian financial crisis and the current European debt crisis have raised fears of worldwide economic meltdown due to financial contagion.
The crisis in Asia started with Thailand after the collapse of the Thai baht. Thailand back then had acquired huge foreign debt after years of easy credit during the early 1990s. This led to severe financial over extension that eventually found its way to real estate. When the property bubble eventually collapsed, capital started to flee and hedge funds started shorting Asian bonds, stocks and currencies. Thailand had no other recourse but to let the baht float (which prior to the crisis was pegged to the US dollar). The crisis in Thailand then spread to neighboring countries with similar circumstances (high foreign debt, huge debt-to-GDP ratios) such as Indonesia and the Philippines (TIP is the acronym for Thailand, Indonesia and the Philippines). The contagion eventually spread to South Korea, Malaysia, Hong Kong, Laos and others as the region suffered a loss of demand and confidence.
Similarly, a crisis of confidence emerged in Europe in early 2010 (see our article The “IPIS” Theory, February 22, 2010). Recall that countries in Europe have incurred sharp increases in sovereign debt after their respective governments bailed out their banks in 2008. The problems originally started with Greece but eventually spread to Portugal, Ireland, Italy and Spain. Also known as PIIGS, these countries have the highest deficit-to-GDP and debt-to-GDP ratios in the region. The crisis intensified last June 2011 after a wave of credit downgrades of European debt alarmed investors of potential defaults of sovereign debt. Again, hedge funds now started shorting PIIGS bonds and stocks, eventually leading to shorting European bank stocks en masse.
PIIGS unable to devalue
While many of the Asian and European experiences during their respective crises are similar, there is one big difference. Asian countries back then had the capacity to devalue their respective currencies. Devaluation has the benefits of improving external competitiveness and boosting growth via better export performance. In contrast, EU members have adopted the euro and therefore they no longer have a national currency that they can devalue.
TIP is safe haven
Remarkably, the PSE index has performed relatively well during this crisis. While most markets have declined by more than 10 percent this past three weeks, the Philippine market has only given back 3.6 percent and is still up 3.3 percent year-to-date (see prior table). As discussed in last week’s article (see Bad News, Good News, August 15, 2011), we believe that some of the funds fleeing the Western developed world are seeking refuge in the ASEAN region, led particularly by TIP countries (Thailand, Indonesia and Philippines). These countries which have been hit hard during the 1997 Asian financial crisis have learned their lessons well and are now considered among the more fiscally responsible and stable countries around.
Gold at record high, silver resurrected
The EU debt crisis, coupled with worldwide economic slowdown (as shown by the recent US and German numbers), have sent markets into a tailspin. The resulting turmoil has sent investors piling into safe havens like gold and silver. Gold hit another all-time high last Friday, reaching $1,881 per ounce before closing at $1,850.2 per ounce. Silver also gained significantly, rising 9.9 percent last week to $42.93 per ounce.
Locals resort to buying Lepanto, Manila Mining and Philex
As mentioned in last week’s article, the surging price of gold is good news for the Philippines since gold is one of our major metal exports. This is also the reason why the stock prices of Lepanto, Manila Mining and Philex have performed very well this year. In the US, investors can buy ETFs such as StreetTRACKS Gold Shares ETF (symbol: GLD) or iShares COMEX Gold Trust Fund (symbol: IAU) to get exposure to gold.
Here in the Philippines, investors who cannot buy physical gold or ETFs like GLD resorted to buying gold mining companies such as Lepanto, Manila Mining and Philex to get exposure and ride on to the yellow metal’s bull trend. In fact, this was the recommendation we gave when we wrote Gold Sparkles (Dec. 13, 2010). Since we wrote the article, Lepanto “B” has surged 315 percent from .385 to 1.60, Manila Mining has increased 224 percent from 0.021 to 0.068 and Philex has risen 91 percent from 14.60 to 27.90.
For further stock market research and to view our previous articles, please visit our online trading platform at www.wealthsec.com or call 634-5038. Our archived articles can also be viewed at www.philequity.net.