Page last updated at 23:41 GMT, Thursday, 5 March 2009

Stock markets take turn for worse

Jamie Robertson
By Jamie Robertson
Business presenter, BBC World News

A trader works on the floor of the New York Stock Exchange during morning trading March 3, 2009
Most stock markets fell in February

Last month, I wrote that the world's equity markets had succeeded in bouncing along within a trading range since November.

In the US, the S&P 500, for instance, had held steady just above a floor of 750, despite a welter of bad news.

Well, it looks as if that floor has just given way, or at the very least one foot has just gone through a floorboard and there's a nasty sound of splintering wood.

A lot of the bad news started with the terrible figures out of Japan, when GDP was shown to have contracted by a staggering annualised rate of 12.7% in the last quarter.

The world's second biggest economy, which has been a symbol for decades of exporting power, revealed a trade deficit for the fourth month in a row, and industrial production slumped.

HSBC said this was "likely to mark the worst downswing ever for Japan's economy".


The crisis was hardly helped by the Finance Minister Shoichi Nakagawa resigning after turning up to a press conference under the influence of either alcohol or (his version) cold medicine.

We're almost flying blind
Mirabaud Pereire

The damage here was largely political rather than to his economic policy.

But the markets have always been lukewarm about the proposed stimulus packages: $7.9bn to be spent buying shares owned by the banks, cash hand outs of $120 a head to huge swathes of the population, and calls for another $300bn stimulus package, have all had precious little effect on confidence.

The Nikkei fell 9% last month.

"The country was doing well when the rest of the world was booming, but the fall in its main markets killed exports dead," says Bronwyn Curtis, head of global research at HSBC said

"And there is no domestic consumption to take up the slack - there hasn't been any since the bubble burst in Japan in the early 1990s."

It was a month of terrible corporate results too.

One Tokyo newspaper survey suggests that 38% of companies now plan to cut dividends or give them up completely.

What's worse is that the foreign investors have also given up on Japan.

They sold a net $15bn of shares in the first five weeks of the year, which partly explains the 10% fall in the yen.

That weakening of the currency is of course reassuring for Japan's exporters, but it's come rather late in the day.

The 32% fall in Toyota's sales in the US in January alone was not just due to the strong yen - and a 10% currency correction will not ease the fundamental problem of global recession or restore domestic consumption.

Problems in Europe

Another shocker was the cloud that descended over Eastern Europe when Moody's, the rating agency, said that western European banks could get seriously hurt by their exposure to the region.

People are getting a lot more cautious
Stefano Mazzola

The Hungarian and Polish stock markets fell around 10% while Ukraine's main index fell double that amount.

Unicredit, Italy's biggest bank , which has 14% of its loans in eastern Europe and Turkey saw its shares fall 35% during February.

The bank is now pressing, with five other European banks, for the European Union to put together an aid package for the region.

Flimsy floor

In the US and the UK it was further revelations about the banking sector that pushed the markets below that flimsy floor that had managed to support them since November.

US dollar notes
Many investors just want to make sure their money is safe

The Royal Bank of Scotland in the UK and Citigroup in the US both got further government capital injections which brought both to the brink of nationalisation.

As in Japan the dividend cuts are coming thick and fast.

In the US, General Electric, which historically has been the country's biggest dividend payer, gave up the fight last month and cut its payout to shareholders.

JP Morgan, Dow Chemical, Motorola, Pfizer, Axa and Allianz have made similar decisions. BP said it will be freezing its dividend this year.

So anyone who, through all the gloom, thought a) that equities were cheap b) couldn't go much lower and c) offered a handsome dividend yield, was wrong on all three counts.

"Take the example of the oil companies: the prices kept on going up, and the valuations stayed high - because the people kept on thinking the dividend was safe," Stefano Mazzola, economist at Mirabaud Pereire.

"But that is changing, and people are getting a lot more cautious," Mr Mazzolo said.

Looking cheap?

So, as the markets lurch lower who dares to say that valuations are cheap?

Mirabaud Pereire measures share prices in Europe against the trend of earnings over the last thirty years, and reckons they are at their lowest since 1981.

But that's no reason to buy.

Its latest Market Valuation Report says:

"We're almost flying blind, with only the US and UK long-term valuations for the vaguest of guidance."

"The market is either very cheap…or 25 years of trend-earnings assumptions must be jettisoned and replaced with a new, and as yet unpredictable, trajectory."

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