by Philippe Kotsaridis It’s true. We’ve been witnessing an economic contradiction for almost two years now. What is it? On the one hand, the order books of companies are not filling up. On the other hand, we are seeing a steady increase of share capital on the stock exchange! It is becoming increasingly difficult to explain the discrepancy that exists between the value of the action that supposedly represents the financial health of a company and the value expressed by its balance sheet, which is also a reflection of the real economic situation at any given moment in time. Apparently, there are purely speculative factors, baseless and artificial, that can drive up the stock market. And who’s to say speculation translates into a bubble! And who’s to say a bubble will result in a stock market crash! For example, the BEL 20, the Dow Jones and the Eurostoxx are now exactly at the same level or at slightly higher level compared to five years ago. Ironically, during the past five years, the rate of unemployment has increased and we were treated to a banking crisis, the Greek debt crisis, the slowdown in industrial productivity, a marked decline in consumption, uncertainties about global growth related to the crisis in Syria and Ukraine and a significant European stagnation that generated deflation. These are some events that affected the real economy and yet we almost didn’t find any reflection of this in the stock market quotations for companies, including those facing serious difficulties. Another factor is the policy of the Federal Reserve (the central banking system of the United States) that favours equity investments at the expense of the real economy. Also, with the current level of interest rates, the Fed also participates in maintaining equity valuations. Should we, therefore, expect a new stock market crash? Or a correction? Let’s not forget that a stock market crash produces a sudden drop in stock prices and is precipitated by a drop in the index of one or more places worldwide. There is also a consensus that there is crash when the index loses more than 10% in one session or 20% in just a few days, which has happened only twice in the 20th century – once in 1929 and a second time in 1987, Even in 2008, at the height of the financial crisis, we did not see a stock market crash though there was a very high price volatility and we expected some corrections. It is obviously difficult to predict what will happen, especially since no one is immune to speculation, manipulation (as in the case of Enron) or unexpected geopolitical events. Investing money in the stock market is a kind of a game in which no one can master the rules. Certainly, the much-anticipated third quarter results will be decisive as regards any corrections that should have several listings, including the primary markets (Russian embargo on food processing). In turn, emerging markets, which represented a concern during the first six months of the year, now seem particularly dynamic. They gained 4.3% over the past two months thus the MSCI World Index (which includes all countries) will break record after record... And making a big entrance on Wall Street is the Chinese online retail giant Alibaba, which raised a record $25bn. It’s the largest IPO in history! But how long will the euphoria last? Until the next crash?
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