Crisis flashbacks hit traders hard and fast

Hong Kong

FIRST came the hand-wringing over unsustainable stock valuations. Then it was fears of an emerging-market meltdown. Now, Italy and the euro are in the crosshairs. As the world ponders whether 2018 is when financial markets finally buckle after a nearly decade-long boom, there's no shortage of potential crises to keep traders awake at night.

The year is less than halfway over and pundits have already evoked the dot-com bubble, the emerging-market chaos of 1997-98 and the euro area debt scare of 2012.

This year's gyrations are less extreme than those of past crises by most measures, but they've nonetheless jarred investors who've grown used to the central bank-induced state of calm that descended over markets in recent years. The question now is whether to buy the dip - a strategy that paid handsomely over the past decade - or to cash in on one of the biggest-ever bull runs for risky assets. "We're getting these mini crisis re-runs that are really sapping sentiment," said Patrik Schowitz, a global multi-asset strategist in Hong Kong at JPMorgan Asset Management, which oversees US$1.7 trillion. "Though it's clearly not the same magnitude, it's just one thing after another and people barely have time to digest things. A period of calm is what we need to let the market regain its footing."

The backdrop to this year's turbulence is the Federal Reserve's move to increase interest rates from rock-bottom levels that have prevailed since the 2008 global financial crisis. That's putting upward pressure on US Treasury yields and prompting investors to reassess valuations across a range of asset classes. While this week's turmoil in Italy has raised questions about how aggressively the Fed will tighten policy, investors still see a hike in mid-June as a virtual certainty.

Nowhere was the valuation scare more evident earlier this year than in blue-chip technology stocks, which in February endured their first 10 per cent sell-off in two years. While the rout wiped out US$1 trillion of market value at one point, it paled in comparison to the 82 per cent slump in global tech shares after the dot-com bubble burst in 2000.

So far, the same has been true for this year's panic over emerging markets and European politics. Some 20 years ago, the MSCI Emerging Markets Index lost more than half of its value as East Asia teetered on the brink of financial collapse, raising fears of a systemic economic meltdown. Turmoil in Turkey, Argentina and Indonesia this year has yet to spark anything close to the same level of contagion. And while political chaos in Italy has punished markets in Portugal, Spain and Greece this week, bond yields in those countries are still far off 2012 levels.

It helps that China and the US banking system are still widely viewed as sources of stability, even as politicians in the two countries spar over trade. Growth in Asia's largest economy has been steady over the past few quarters, and few expect the country to devalue its currency - a move that roiled global markets in 2015. While dark clouds are forming over Italy's banking sector and Deutsche Bank AG, America's financial heavyweights are making money hand over fist and have bigger capital cushions to whether downturns than they did in 2008.

That hasn't stopped bears, including George Soros, from warning of a calamity in the offing. The billionaire investor said on Tuesday that a surging dollar and capital flight from emerging markets may lead to another "major" financial crisis, adding that the European Union faces an imminent existential threat.

Still, Mr Soros has been calling for a global crisis as far back as 2011 - and markets have mostly marched higher. Anyone who bought an S&P 500 Index fund after he warned of a 2008-like environment in January 2016 would be sitting on a gain of about 35 per cent. Given the uncertainty surrounding Italy and the removal of central bank stimulus, it's sensible for investors to pare their exposure and watch how events play out, according to Hao Hong, chief strategist at Bocom International Holdings Co in Hong Kong.

On the question of whether another big crisis is imminent, he said it's too early to tell. "In this kind of environment, my advice is to take less risk," he said. BLOOMBERG

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