Global stock markets may have rallied too far too fast over the last five months as they bounce back from a panic plunge provoked by the collapse of Lehman Brothers investment bank a year ago, analysts warn.
Stock markets, already in retreat from the bursting of the US subprime home loan bubble, were thrown into panic when the fall of Lehman Brothers turned a financial crisis into a threat of systemic failure in leading economies.
Leading markets climbed back from the depths in March and April, and then in July and August rallied strongly again, recovering much of the ground lost over 12 months.
But in the last few days they have faltered because of doubts about the underlying dynamics of signs that leading economies are pulling out of recession. On Wall Street, losses since September 15 when Lehman Brothers collapsed have been reduced to 18 percent, in London to 10 percent, Tokyo 16 percent and Paris 15 percent. The main stock index in Shanghai has jumped by 37 percent.
But these rebounds still leave stock indices far below the high levels attained before the bursting of the subprime bubble marked the beginning of the crisis in August 2007. "With Lehman, markets factored the end of the world into the price of shares, because the improbable had occurred," said a senior manager at EFG Asset Management in Paris, David Kalfon.
Since March, when stocks reached a low point, "the markets have realised that it was not the end of the world and this relief has pulled them upwards." At Turgot Asset Management in Paris, Arnaud de Champvallier said: "The 2009 second-quarter results of many companies and the economic indicators in recent weeks have been better than expected, and this explains the rise of stock markets."
But he also observed: "They cannot go much further for now because the maximum possible gains have been drawn from these second-quarter results."
The head of share portfolio management at Groupama Asset Management in Paris, Romain Boscher, commented: "The good news is that things are on the move again. "The bad side is that this is not on a solid basis. The economy is emerging from its torpor, but this is still very financial without extension to the labour market or industry."
Boscher said: "The stock market is certainly looking ahead. But here it is anticipating in the space of three or four months the next three or four years. It's excessive. The market is behaving as if everything is over although we have only avoided the Great Depression."
Boscher, in common with the other analysts, highlighted the explosion of debt incurred by states which they said, at worst, could lead to a crash on the government bond market. The head of strategy at Societe Generale in London, Albert Edwards, was bluntly pessimistic, saying that stock and credit markets had experienced the biggest bubble in history, and it was not yet over.
He said: "When I look at the 1930s, there were periods when growth improved: at the end of 1929 and then in 1931, but the market collapsed again." He warned that "the rise since March has just been a very large blip which will unwind."
However some of these experts argue that the recovery is also evident in the volume of trading.
From the summer of 2007 (in the northern hemisphere) to May 2009 investors and small shareholders switched funds from stocks to money markets. Since the end of June, there has been a reversal because interest available on money markets is close to zero. However, the switch back is gradual. "Some people have been traumatised on stock markets, losing up to 50 percent of their savings invested in shares," Kalfon said. "It will take time for them to regain confidence."
This stock market plunge alarmed investors more than the bursting of the Internet bubble had done in 2001 because it shook the banks, the pillar of the economy, said Fabrice Moulle-Berteaux, another expert at EFG.
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