Market turmoil not driven by worsening fundamentals

OVER the past two weeks or so global equity markets have suffered violent moves reminiscent of the financial crisis. Despite a significant retracing in recent days, a sense of apprehension, almost fear, lingers. In our view such turmoil is a reflection of post-crisis reforms to financial markets rather than any change in economic fundamentals. Consider, for example, that share prices have historically declined between a fifth and a quarter around recessions. In other words, the selloff priced in half a recession in America in just four days. The collapse in German equities since April suggests a full recession - pure madness.

Some argue stocks were overvalued in the first place. While mainland Chinese markets were undoubtedly due for a correction, it is less clear developed equity valuations were stretched - particularly as the economic backdrop to these markets was improving. Today, an earnings multiple of 13 times for the Dax, for example, looks positively attractive.

Let us look at the facts. Last week, a collapse in Chinese stocks rapidly spread across geographies and assets. In six trading days the Shanghai index plummeted a quarter. Meanwhile, the S&P 500 fell a tenth and European shares dropped 16 per cent beneath their April highs. The export dependent Dax was hit particularly hard. In all, 30 of the world's largest bourses dropped 20 per cent from recent peaks.