Stocks fall, but no danger of crisis, economists say
Markets lose 10 percent within one week, but risk of downturn is 'misplaced', economists say

Fears of global crisis that sparked a selloff on stock markets around the world are "misplaced”, economists said on Tuesday.

"Although global equity indexes have lost about 10 percent within the week, there is little change of a sharp downturn," commented Andrea Cicione, an economist with Lombard Street Research in a note published on Tuesday.

"The August scare is a false alarm," wrote Nomura strategist, Jens Nordvig, in a note published on Monday.

For Cicione, the global stocks selloff is just a spot of volatility in a long-term positive trend. "Some investors worry that China, whose economy is now comparable to the U.S. in size, could lead to another ‘2008 moment’ for the global economy. Such fears look misplaced: China is a large current account surplus country when commodities are excluded. Its slowdown means commodity exporters will be hit hard, but that doesn’t mean that the world economy is headed into a recession," he said.

He noted that volatility spikes were not uncommon, but they did not necessarily signal an imminent downturn. "Our macro view remains constructive, and recent events in China do not change that.”

For Nordvig, fears of a slump in China are greatly exaggerated. "The economy in China is already coming back," he pointed out.

Stocks are still reacting to the approximate 5 percent devaluation that took place in the week of August 10, but this is decoupled from the global economy and not likely to cause a systemic crisis, he said.

"The point is that the devaluation will work to stabilize the Chinese economy," Nordvig added.

All of which means that the fears for a terrific slump in China are overblown, and the global economy will not be dragged down by it, he said.

"In fact, radically cheaper Chinese goods [whether by Producer Price Index deflation or renminbi depreciation] will add to the consumer-income boost in the West and elsewhere that is also augmented by the latest slide in oil and metal prices," Cicione continued.

"From this perspective, the current risk-off phase should provide investors with an attractive buying opportunity. Risk-reward is starting to look favorable: a broad range of indicators [such as the percentage of stocks with a Relative Strength Indicator below 30, investor sentiment surveys and the spike in the VIX] point to oversold conditions," he said.

Relative Strength Indicator is a technical analysis tool; the VIX is an indicator of fearful investor sentiment.

For some economists, however, the global stock selloff is part of a larger trend indicating investor dissatisfaction. "Investors are really reacting to the weak economies in the West," wrote Stephen Roach, former chairman of Morgan Stanley Asia, in a note published in Slate on Monday.

"China is the excuse, not the reason," Roach said.

Last Modified: 2015-08-25 10:44:18
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