Should you worry about this global market sell-off ?

The bear market, in which global stock markets entered this week, is something many hedge fund managers were waiting for. It’s not a 10% correction just like it was the one of last summer. It’s a more than 20% correction. This is what many technical analysts consider, the first step of a larger bear market. It can potentially push the major stock indexes around the world even lower. But which are the reasons of this sell-off ? We will list here some of the main causes of the last market turmoil:

  • The raise of the interest rates by the Fed. This financial event’s impact is much larger than you could expect. It has to do with the carry trade around the world and with the stronger dollar. It can weight on emerging markets, currencies and oil prices, destabilizing many emerging markets.
  • The Yuan devaluation is having a strong impact in the decision making process of many investors. Those funds that have been investing in the country in the last decade and have considered the currency risk low enough, because of the peg between the Yuan and the US Dollar, now are running to take out the money in front of a further Chinese currency devaluation. This process had a huge impact on the Chinese stock markets, the last month, pushing down the Shanghai Index, even under the 3,000 points, considered by many international investors a very strong support.
  • The collapse of the oil price is another of the main reasons of this global sell-off. The financial markets of the emerging countries, which heavily depend on the price of oil, have also been plunging the last months. The mining and oil sector in the US have also been under huge pressure. This has started to cause defaults on the large indebted companies, impacting the high yield bond markets. We are at the point that stock markets and oil prices are highly correlated. We see the Dow falling deeply every time the oil prices collapse.
  • The hard landing of the Chinese economy is much likely to be the other reason of the sell-off. The engine of the world economy is now decelerating. The second largest economy in the world by nominal GDP and the first by PPP-GDP, has been the real engine of the world economic growth in the past years. It has contributed for almost 40% of the entire growth. The country also contributed to pass successfully the last financial crisis of 2008. But this time, the land of dragons, can’t keep the same contribution on the world economic growth, as many investors talk about a hard landing of the economy. And the biggest problem for the country could be down the road, because of the large debt in the private sector and the high percentage of the non performing loans.
  • The last reason why the markets are falling is because they simply want to correct. And when the Big Money want to sell, every reason is good. Hedge funds are betting heavily against the oil prices, the commodities and the high yield bond markets. These guys have a clear intention, take advantage of a tired bull. In fact the bull market lasted too long, it has been one of the strongest in years.

Now, the most important question is, how much worried should we be? Our opinion is that probably we are going to see some further correction in the global stock market. But we continue to remain optimistic on a longer perspective. On our point of view this should simply be considered as an opportunity to buy stocks, according to a plan of accumulation and diversification.

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