We anticipate a serious downfall in stock markets now. There are several critical risks.
Universe is full of contradictions – grave risks and enormous opportunities exist at same time.
With huge young population, India has the world’s biggest demographic dividend benefit that can drive its growth for decades. It is supported by political stability, growing economy, and a pro business government. Though we are facing a slowdown and various economic headwinds, but the long term growth is not yet at any
drastic risk. (Also read – India to Take off Again – A New Growth Phase Based on Structural Reforms)
But risks can materialize – any time.
There are lurking risks that can derail not just Indian, but the whole global economy. And in a world where people, ideas, goods, and capital are moving faster and faster across borders around the planet, the impact will be swift and catastrophic.
Why we are talking of a recession now?
Because there exists reasons, and the results can be disastrous this time – definitely worse than 2008.
In this 100 years chart of Dow Jones, it has moved in the upper band in its very long term rising channel since 2017. This happened only twice before: in 1929 and in 2000. Again, it is at that extreme and at an all time high (29274 as on 11-Feb-2020). The next fall can bring it back to near its lower support at around 7000. That is a decline of about 75%.
Are there any reasons for it?
Yes. There are enough reasons to support possibility of this 75% fall. There are serious global risks that can trigger a recession and the biggest reason for a drastic fall is that this time governments do not have the policy tools they had in 2008 to prevent a financial shock turning into a freefall, and overall debt levels are higher than during the previous crisis.
Most of the stock markets across the world have skyrocketed during last few years. The sharper the rise, the harder they can fall. Especially in case of India, where most of the recent market upside is built on hope, rather than performance, any doubt on recovery can puncture the markets. The high valuations make it even more risky.
The Indices in 2008 had fallen over 50% and stocks had fallen even more. But it started recovering from 2009. This time the situation is structurally worse across the globe and in case of a recession, there will be no one to bail out! It may be a free fall. The possibility of a 75% fall is not at all sensationalism, it can be a reality.
The consequences are unimaginable.
Risks are rising and growth is falling
“2020 is a tipping point” – Eurasia Group in its 2020 world risk report.
Eurasia’s annual ‘Top 10 Risks’ of the year list is considered one of the foremost geopolitical indicators among global investors, multinational firms and various financial and business consultancies.
Excerpts from Eurasia Group report – “… with China and the United States decoupling from one another on technology, a critical piece of the 21st-century economy is now fragmenting in two. Countries across the developed world have become more polarized, increasing the power of tribalism. Add the shrinking of supply chains with changes in the politics, economics, and technology of manufactured goods and services, and suddenly globalization has a split personality.
Then there are the economic and geopolitical trends. Both are now cycling downward. The global economy, after emerging from the great recession of 2008 with the longest expansion of the post-war period, is now softening. More economists expect a recession in 2020 or 2021. And the world is now entering a deepening geopolitical recession, with a lack of global leadership as a result of American unilateralism, an erosion of US-led alliances, a Russia in decline that wants to undermine the stability and cohesion of both the US and its allies, and an increasingly empowered China under consolidated leadership that’s building a competitive alternative on the global stage.”
The economic and geopolitical trends are cyclical, which sooner or later will become more favorable. But climate change is irreversible and is beginning to constrain economic growth and to matter on the global political stage as never before. And it is only going to increase over time. In 2020, we have a combination of negative trend lines that we’ve not experienced in generations.
Some key risks mentioned by Eurasia group –
- Rigged: Who governs the US – the world’s best institutions of US are losing their legitimacy and control under Trump. His irrational policies can be a big risk for global stability.
- The great decoupling – The decision by China and the US to decouple in the technology sphere is the single most impactful geopolitical development for globalization since the Soviet Union collapsed. When the two largest economies politicize their most important trading relationships, innovation and supply chain systems become more regional and less global. As the rifts widen, they’ll risk becoming permanent, casting a geopolitical chill over global business.
- US/China – Divergences between the US and China’s political structures are bringing irreconcilable differences to the fore, and tensions will lead to a more explicit clash over national security, influence, and values.
- India gets Modi-fied – Prime Minister Narendra Modi has spent much of his second term promoting controversial social policies at the expense of an economic agenda. The impacts will be felt in 2020.
- Shia crescendo – US policy toward the major Shia-led nations in the Middle East is failing. That creates significant risks for regional stability.
Another research organization WEF is equally concerned about global risks. Its 15th edition of Global Risks Report recognizes that critical risks are manifesting. According to WEF report – “The global economy is facing an increased risk of stagnation, climate change is striking harder and more rapidly than expected, and fragmented cyberspace threatens the full potential of next-generation technologies — all while citizens worldwide protest political and economic conditions and voice concerns about systems that exacerbate inequality. The challenges demand immediate collective action, but fractures within the global community appear to only be widening.”
Top Economic Risk – The Debt Bomb
Globally, debt—whether corporate debt, household debt, or national debt, whether in developed or developing economies—is at record-high levels, which is itself partly a product of the loose-money policy many central banks pursued to cushion trade and other shocks to the economy. That is itself a cause for concern, as those central banks, with interest rates already low, don’t have a lot of room to cut further to cushion any fresh debt shocks.
And the debt pile is huge. According to estimates of the Institute of International Finance (IIF), the Washington-based global association of the financial industry, overall international borrowing rose to more than $246 trillion in the first trimester of 2019, nearly 320% of worldwide GDP. Simply put, the world borrows over three times more than it produces.
The World Bank has also highlighted the risk of a fresh global debt crisis after warning of the biggest buildup in borrowing in the past 50 years.
Debt growth is particularly alarming in emerging markets, the World Bank says, which hold about $50 trillion in debt, making them particularly vulnerable to any shock, whether a generalized slowdown, or more trade wars, or a financial markets correction stemming from either of the other two. Developing countries have already been through three debt crises—in the 1980s, the 1990s, and the 2000s—with hugely painful consequences. A fourth might be on the way, the World Bank warned, with similarly nasty implications: “The fourth wave looks more worrisome than the previous episodes in terms of the size, speed, and reach of debt accumulation” in emerging markets, the bank found.
“2020 may be the year when the ‘largest, broadest and fastest’ wave of debt crashes over the global economy” – World Bank
The sheer amount of global debt means that any financial market correction—whether triggered by continued trade wars or corporate bankruptcies and defaults or something else—would have immediate impacts, especially on countries with few built-in shock absorbers.
“Renewed episodes of substantial financial market stress could have increasingly pronounced and widespread effects, in view of rising levels of indebtedness,” the World Bank said.
China is the biggest emerging economy and the World Bank suggests that the “debt-fuelled” investment boom there could result in non-performing loans and a corporate debt crisis. Given the size of China’s economy, spillovers to other emerging economies could be “significant”.
Total public and private debt in emerging and developing economies has increased dramatically over the past 50 years – from 47 per cent of GDP to around 170 per cent, according to the World Bank. Government debt has doubled to 50 per cent while private debt has risen six fold to 120 per cent.
Even advanced economies such as the United States are potentially vulnerable, with a heavily indebted corporate sector. If corporate defaults rise, which could lead overvalued stock markets to plummet, that would have knock-on effects on consumer sentiment, which in turn would have huge impacts on U.S. growth expectations: Fitch Ratings agency expects that would halve its outlook for U.S. growth in 2020 to just 0.8 percent.
“Long-term valuation metrics for US equities are near historic highs increasing the probability of a correction, especially as potential risk triggers such as a hard landing in China or trade-related uncertainties are likely to persist,” – Fitch.
The world growth is peaking
Several strategists have labeled 2020 as ‘Peak Decade’.
It is a growing risk being acknowledged that we are witnessing peaks in key drivers of the world economy. The main points are –
a. Peak globalization
- The era of people, goods and money flowing increasingly unchecked around the world may have passed its high point as governments pursue protectionism and erect more obstacles to migration.
- Already there are around 77 physical barriers delineating international borders compared with 15 in 1989 after the fall of the Berlin Wall, according to Bank of America.
- The World Trade Organization calculates the pace of growth in international commerce fell below the rate of economic expansion in 2019 for the fifth time since the financial crisis.
- Foreign direct investment inflows have been on the decline since 2015, says the United Nations.
- The U.S.-China trade war seems to cool down, but the Peterson Institute for International Economics reckons the average U.S. tariff on imports from China is still 19.3% versus 3.1% at the start of 2018.
- Trump is also seeking to remodel the World Trade Organization and potentially clamp down on European auto exports.
- The U.K. still needs to strike a post-Brexit trade deal with the European Union.
b. Peak Capitalism
- Companies are shifting their focus from shareholder first to stakeholder first, due to rising populism, climate change, and rising inequalities.
- The maturing millennial generation is also behind this shift. When making investment decisions, 87% of those born between 1981 and 1996 believe environmental, social and governance factors are important, according to Bank of America.
c. Peak Youth
- For the first time, there are now more seniors than children in the world and that trend is set to escalate, according to the UN.
- The global fertility rate already halved from 5 children per woman in 1955 and the average life expectancy has increased from 31 in 1900 to 72 today and is tipped to reach 83 by the end of this century.
- The growth of the working age population is also set to slow, straining pensions and healthcare resources. In a recent paper, Stanford University Professor Charles Jones said there is a “distinct possibility” that global population will decline rather than stabilize in the long run, threatening economic growth.
d. Peak Climate Change
- The world faces a sweeping series of climate-related tipping points — from melting ice caps to droughts and dying coral reefs. Nature magazine in November collated the risks, which they described as a climate emergency that will compel political and economic actions on emissions. 21 of the hottest years on record came in the last quarter century.
- “We argue that the intervention time left to prevent tipping could already have shrunk towards zero, whereas the reaction time to achieve net zero emissions is 30 years at best,” the article’s authors wrote.
e. Peak Cars
- The 1.3 billion vehicles on the roads today are probably the most there will ever be. Megacities will house around two thirds of the global population by mid-century, cutting back on the need for expensive cars.
- Evolving urban architecture will also increasingly constrain car usage. The shift is already underway in mature markets. Only 26% of U.S. 16-year-olds earned a driver’s license in 2017 compared with almost half just 36 years ago, according to Sivak Applied Research.
- Even if overall car sales remain robust, cheaper technology such as robotaxis and developments such as ride-sharing stand to take the shine off their attractiveness.
f. Peak Central Banks
- Central banks may have rescued the world from depression in the wake of the financial crisis, but their ability to turnaround their economies from here is limited after what Bank of America estimates is more than 700 interest rate cuts and around $12 trillion in quantitative easing since 2009.
- Negative interest rates are already being blamed for hurting banks, while demographic shifts, record debt levels, technological disruption and bank deleveraging all sap the potency of monetary policy. That leaves politicians under pressure to loosen fiscal policy the next time trouble hits the world economy, and that has very limited scope.
Though these factors by themselves cannot be reasons for a severe recession, they will definitely contribute significantly in aggravating impact of a recession triggered by any of the risks mentioned above. Additionally, a realization that global growth has peaked and the new norm for growth would be at a significantly lower level; will cause a de-rating of the markets.
Invest at your own risk in equities.
Impact on Economy
All recessions hit the lower and middle class the most. Instead of detailing the impact, we suggest you Google about The Great Depression, to get a better idea of impact of a prolonged recession. Some pictures from that era –
How to safeguard your capital and earn during recession
The recession may occur this year, or may take few more years, or in exceptional case, some miracle may prevent it. But whenever it is going to happen, you need to completely exit from equities. There are some unconventional strategies that can generate good returns even during recession. And some of the other asset classes may even shoot up in that duration.
We have been 100% correct in all our market direction forecasts ever since we started it in 2014. Details and all links of past forecasts can be seen at – Investment Blog.