The fund manager says it is nothing like the 1987 crash but more like death by a thousand cuts. Head of research Jim Wood Smith notes that all manner of factors that apply in many crashes are not apparent in this instance.
He notes that there are none of the usual signs of excess in equities, institutional cash weights are felt to have been high, the housing market is landing softly, inflation is well controlled and M&A activity levels are still very good and yet we have seen a 13 per cent fall in the equity market from its June peak.
He says it is almost impossible to call the timing of any bounce in share prices of stocks which have been sold “irrationally heavily”. He says that picking the timing will be nothing more than luck.
He adds that it is currently uncertain whether the worst is now past or if the FTSE could be on 5000 by October.
He says: “It is it said the dollar is rising as a safe haven despite the increased belief in a Fed rate cut, but if there is really safe haven buying, why isn’t gold rising. The answer to that questions isn’t clear yet.”
Wood Smith also says that as some institutions see credit markets dry up they may be forced to sell equities as a source of funding.
He says that the key feature of yesterday’s rout was the yen with the carry trade “unwinding at an extraordinary pace before our eyes. Yesterday the yen rose 3 per cent against sterling, 2 per cent against the dollar and the euro and an almost unbelievable 6.6 per cent against the New Zealand dollar.”
He says: “All the funds that have borrowed yen to invest in anything else are caught in the crossfire of seeing the value of their debt soar and the price of the long asset tumble. Throw in margin calls and unit redemptions and the conclusion is panic selling. But selling of what? If the markets for anything esoteric or involving credit have dried up, then equities are the source of funding of choice globally. This is starting to feel like it is almost reaching sell what you can proportions.”
“At this stage it is easier to analyse than it is to conclude. We’re all reminded that we cannot control the markets; the good news is that we can spot cheap assets. Equities look good, conventional bonds look expensive still, especially the long dated and lower credit rated corporates. Short index linked look excellent value. The usual nicety here is to say that “we expect the period of volatility to continue”. What this actually means is that noone has the foggiest.”