A RESEARCH institute, that predicted the financial turmoil of 2008 has since late last year been forecasting a massive blow-out in global markets. But how realistic is the doomsday scenario it is predicting?
The Jerome Levy Forecasting Center, based in Mount Kisco, New York, says there is a 65% probability of a worldwide recession. This recession, it said, would be the result of developed economies — such as the US and the eurozone — having balance-sheet excesses that expose them to renewed financial crisis.
“Clearly the direction of most of the recent global economic news suggests movement toward a 2015 downturn,” said chairman of the centre David Levy.
Mr Levy said emerging markets continued to invest in export infrastructure to sell goods to developed nations that no longer had the financial resources to buy. This, he said, would be a leading factor behind a crash.
Economist Robert Wiedemer, also known for correctly foreseeing the collapse of the US housing market, equity markets and consumer spending, which sent the world into recession, has said he too believes a crash is on the horizon — one more catastrophic than the last.
“”The data is clear; (there will be) 50% unemployment, a 90% stock market drop and 100% annual inflation (in the US) … starting as soon as 2015,” he said in an interview with American publication Newsmax.
A collapse of the US market, which has been the engine of growth for world markets in the past six years, would lead to a crisis. But Vestact asset manager Sasha Naryshkine said it would be difficult to predict what financial markets will do next.
“People have purported to be the harbingers of equity markets death since 2009 yet… here we all are,” he said.
Consensus view among market participants is that equities will still outperform other market classes.
But investors have been spooked by world events which have increased volatility in stocks. Panicked investors have been moving their money out of stocks and into government-backed securities as well as gold. Since the new year, the South African bond market has clawed back roughly one-third of the losses it incurred last month. Foreign investors have bought R1.7bn of South African bonds.
IG market analyst Evan Lucas said investors had become almost complacent last year due to the lack of volatility.
“For five years, investor fear of risk has been drugged by repeated injections of quantitative easing. The lack of fear has led to a world where price and risk have become estranged.”
Afrifocus Portfolio manager Ferdi Heyneke said the gold index on the JSE had climbed more than 14% since Monday, which was an indication of just how spooked investors were.
“Commodities priced in US dollars usually have an inverse relationship to the world’s reserve currency. None more so than gold. You know investors are looking for safe havens when even a rampant dollar cannot stop the price of gold from rising,” he said.
Mr Heyneke said the probability of a stock market crash was minimal, but since markets reached record highs last year they were in for a correction.
“Look, it’s hard to make such a prediction. Certainly there are risks and headwinds ahead this year but to say it will be a crash is contestable,” he said.
“Markets moved in quite a big way over last year. I think it would be foolish to think that we could see those kind of returns again this year especially with so many uncertainties,” he said.
Mr Naryshkine said a key issue to watch for would be the fallout from oil prices. He said it was a catch-22 as companies heavily invested in oil could see a pull-back, but that would mean rates would remain low in many parts of the globe, which was good for emerging markets.
Mr Lucas said 2015 would likely see increased volatility, but that did not necessarily equate to a crash. He said stimulus measures to be introduced this year by central banks globally could shift the world economy into the correct gear.