Market bounces but questions still unanswered

This is is a time to selectively buy. Photo: Regis Divignau

On Tuesday morning before this market bounced, BHP Billiton shares were down almost 18 per cent for the year, and trading on a dividend yield of 9.4 per cent .

Rio Tinto shares were down almost 19 per cent in 2015, and trading on a dividend yield of 9 per cent. Telstra was offering a dividend yield of 7.6 per cent, NAB was on a yield of 9.4 per cent, ANZ was yielding 9.55 per cent, CBA was yielding 8.2 per cent and Westpac shares were yielding 8.84 per cent.

For investors prepared to buy and hold, yields that good are difficult to resist, even though China’s share market dive continued.

The Hangzhou Composite index fell another 7.6 per cent during the day to be almost 21 per cent down in five trading days, but our S&P/ASX 200 index rose 2.7 per cent. Northern hemisphere market futures were volatile, but were predicting solid rises in Europe and on Wall Street on Tuesday night.

The bounce that value hunters deliver will only be sustained in the medium term (say a year) however if there are not deeper problems in the markets and the economies that underpin them – and concerns on that score are not yet resolved.

Citigroup’s top global strategist Robert Buckland updated a checklist of bear market signals overnight, and the results were not overly discouraging

He assigns red lights (worrying), amber lights (perhaps worrying) and white lights (not worrying) to various indicators in  March 2000 when the dot杭州夜网m bull market cracked, in October 2007 when the global crisis began emerging, one year ago, and now.

Global market measures that were flashing red lights in 2000 and 2007 that are white lights now include share price versus book value of assets, dividend yield, equity risk premiums over fixed interest alternatives, and capital expenditure, which is not roaring ahead as it does at the top of a bull market.

Analysts are also bearish, which is a contrarian positive sign. Analysts are most optimistic when a bull market is at its unrealistic peak, and ready to crack.

There are five red lights on Buckland’s bear market checklist, compared with 15.5 in 2000 and 12.5 in 2007.

Buckland says that is monitoring the markers closely, but that so far it looks like we are still in a mature bull market rather than a new bear market.

Here’s a few of the key indicators that Buckland covers.

Global corporate gearing is as high as it was before the global crisis: as a side note, it is still significantly lower than it was ahead of the global crisis in this market.

Global merger activity is also in red light territory, albeit not yet at the highs seen in 2000 and 2007. That is another top of market signal, but again, this indicator is better here, where so-called animal spirits have been weaker, and fewer takeovers have been announced.

I would offer one other comment. So far, this selloff has basically been ring-fenced to the sharemarket. The big risk in a global downturn is that global credit markets will be infected, drying up sources of debt funding. High yield or “junk” debt is being pressured, but there are no signs of the general credit market contagion that was the really big problem in the global crisis yet.

The Chinese share market’s continuing slide on Tuesday was a reminder however that this downturn is not just about valuation. There are more elemental concerns that China’s market downturn is a symptom of a deeper economic problem in China that China’s government is either unwilling or unable to fix, and they remain unresolved.

The Chinese share market roared higher in 2014 and until the middle of June this year. China’s government deliberately pumped up by increasing the price and availability of credit.

Analysts knew that the bull market was being induced – the government was basically manufacturing demand and creating a weight of money surge – but they also saw it as more proof that the government of Xi Jinping was thinking strategically, in this case for example by creating a bull market that could be avenue for the privatisation and deleveraging of state-owned enterprises.

This latest downturn is now being taken as evidence that China’s attempt to stabilise the market in June and July failed. Crucially, it also undermining trust in willingness or ability of Beijing to intervene.

There is double jeopardy involved. If China fails to intervene or intervenes unsuccessfully as it did in a half hearted way on Monday, the selldown could intensify. If it intervenes successfully, many observers will argue that it has just delayed the inevitable.

There’s another, longer term issue. China’s share market was in a bubble. It’s now correcting, big time.

But in recent years we have seen a series of asset price bubbles develop around thew world, and then get corrected. They are emerging because central banks still have interest rates at record lows: investors are paying more for shares, property band other assets than they normally would, to lock in yields that they cannot get from safer fixed interest investments.

It’s a bubble and rinse cycle for the markets that will continue until economic strength is good enough to allow interest rates to begin rising to a point where they are once again a decent place for investors to stick their money.

One irony is that this share market turbulence has probably delayed the normalisation process. The odds on the Federal Reserve leading the way with a mid-September rate hike in the United States are lengthening because of the share market wobbles.