Analyst tips 30 per cent stock plunge By Nick Gardner June 21, 2008 12:00am Email article
Text size + - Analyst is predicting worst US bear market in 100 years Flow-on effect for Australia will be bad Trading: Latest market news and prices
A TOP UK credit strategist from Royal Bank of Scotland is warning clients that the US stockmarket could fall 30 per cent within three months and lead to one of the worst bear markets of the past 100 years.
Bob Janjuah, a star credit analyst who correctly predicted the credit crisis before it kicked in last year, says the global economy is on a collision course with disaster because of high inflation, oil prices and continued fallout from the credit crunch.
He says the US may see a rally into July before short-lived momentum from America's fiscal boost begins to fizzle out and the delayed effects of the oil-price spike really do their damage.
He says that the fall in US markets will be echoed in Europe and emerging markets, which would have knock-on effects for Australia.
"A very nasty period is soon to be upon us -- be prepared,'' he said. "US Federal Reserve and the European Central Bank both face a `Hobson's choice' as workers begin to lose their jobs in earnest and lenders cut off credit.''
The crunch is, he says, that authorities cannot respond by lowering interest rates because oil and food costs continue to push inflation up to uncomfortable levels.
"The Fed is in panic mode. The massive credibility chasms down which the Fed and even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets.''
"The ugly spoiler is that we may have to see much lower global growth in order to get lower inflation.''
Local pain
Chief economist of AMP Capital Shane Oliver says that if the RBS analysts' predictions come true, Australia may well suffer even more badly than the US.
"In recent times our market has tended to magnify both gains and losses on the US markets,'' he said. "When the market hit its highs in November, the US market fell 19 per cent while our market fell 26 per cent.''
"Similarly, the rally from March to mid-May saw us rise by 18 per cent compared to 14 per cent in the US.''
ANZ chief economist Saul Eslake agrees that equity markets may not be pricing in a full-blown US recession and falls could be on the cards but he says that the analyst has it wrong when it comes to central banks and their fight against inflation.
"If interest rates need to go up, they will go up. They (central banks) may have to make difficult decisions but they will make them, so I do not share the analyst's view about the credibility of central banks.''
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