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Last Updated: Wednesday, 28 February 2007, 11:26 GMT
Q&A: Will world stock markets recover?
New York Stock Exchange trader
Many investors are already looking for a way back in
Q: Stock markets around the world have fallen sharply amid worries about an economic slowdown in China and the United States.

What's going on?

One answer could be that what we're seeing here is a bunch of stressed investors releasing a bit of steam.

Tensions have been rising for months amidst a slew of financial data, coupled with pessimistic statements by some of the world's economic tsars, who suggest the stock markets could be close to a peak.

So when shares in Shanghai dived almost 9% on Tuesday - in response to a threat of a new capital gains tax in China - investors' nerves around the world snapped.

Q: Surely there's more to it than investors' knee-jerk reactions to scant news?

Investors' instincts are well-honed and very sensitive to signs of fundamental threats to the global economy.

And recently there have been many such danger signs, most recently voiced by former US Federal Reserve chairman Alan Greenspan who said it was "possible" that the US economy would slide into recession later this year.

Traders tend to say that when America sneezes the world catches a cold, so a downturn in the US could well bring about economic weakness across the globe.

And a global downturn would do little for the health of the companies that are listed on the world's stock exchanges.

Q: So is this the beginning of the end? Will the markets keep on sliding as the global economy plunges into recession?

This is largely about the issue of upside potential versus downside risk - or more bluntly, about greed versus fear.

When investors think the markets are close to peaking they see little reason to buy shares since there is very little potential for their value to grow.

If at the same time they are concerned about the general state of the world economy, then there is a great risk that the value of shares could fall to reflect weaker earnings by companies operating in a depressed business environment.

But beyond concerns about any actual shifts in the real economy, investors are also wary of sudden government intervention, and this is where China has been playing a key role lately.

The Chinese economy is growing at breakneck speed, which has made the country's authorities very aware of the fact that although growth may be good, too much of it can be dangerous.

China is eager to put a lid on this growth and has already begun imposing austerity measures to prevent costs and prices from galloping out of control.

Capital gains taxes would be a step too far for most investors, though, hence the markets' strong reaction on Tuesday.

But surely, China's desire for orderly and controlled economic growth would serve the interests of investors as well?

To an extent this is absolutely true, since many investors tend to value regulatory stability.

And given that we are already hearing a lot of pleasant noises from market observers around the world, there is plenty of scope for optimism.

In China, shares have already bounced back, having recorded a near 4% rise on Wednesday.

The turning point came when China's tax authorities vowed not to introduce the rumoured capital gains tax after all, which along with assurances by analysts that Tuesday's wobble was not indicative of any fundamental weakness in China's economy, went a long way to mollify investors.

In other words, investors might soon return and the markets should thus start rising again?

This is what many industry observers predict. They see the latest dip in stock market valuations as a correction in a bull market: in other words, they predict that the slide will soon come to a halt before the markets resume their lengthy climb.

Exactly when this would happen is anybody's guess, though. It could take weeks rather than days before traders have calmed down sufficiently to roll up their sleeves and get back in there.


FTSE 100
23.70 0.44%
19.54 0.34%
Cac 40
14.48 0.38%
Dow Jones
78.53 0.76%
35.31 1.58%
S&P 500
11.22 1.02%
BBC Global 30
20.65 0.36%
Data delayed by at least 15 minutes

World stock slump hits second day
28 Feb 07 |  Business
Share sale knocks Chinese market
27 Feb 07 |  Business

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