We all know that "hindsight" is the most successful trader in the world. Its performance has always been exemplary since time immemorial.
However, alarm bells should have started ringing after the Shanghai Composite had added 150 per cent in value between June 2014 and June 2015, just when it was becoming decidedly obvious that China’s economy was coming off the boil. The Chinese equity markets had been frothed up by the authorities encouraging the banks to lend money indiscriminately to retail investors to support a plethora of IPOS.
Add to the Chinese conundrum, negative oil and commodities issues, an injudicious US interest rate hike and a deflationary environment and the whole cocktail quickly becomes toxic. In my opinion however, this correction, though violent and painful, was healthy and necessary. Valuations were too frothy, courtesy of quantitative easing, which created a platform of comfort. In summary, I believe the FTSE 100 is within 300 to 400 points from the bottom.
Let’s assume that I am wrong and equity markets are the recipients of some vituperative treatment, resulting in a massive plunge. What are the ramifications? Firstly pension funds exposed to equities will see their deficits growth/surplus diminish.
Over the short term this is of limited importance, but should lower valuations persist then re-valuations will trigger additional contributions from underlying business. Also a measurable cut in dividends would be inevitable, which would have an adverse effect on many peoples’ disposable income, which will damage retail, leisure holiday and travel. That situation then triggers a domino effect which embraces the threat of recession, and the lengthening of the dole queues. This would probably only happen in the event of a prolonged recession and that seems very unlikely.
So let’s assume that we see a really sharp fall from where we are now and that "all boats sinking in a risk off environment" manifest themselves. There will be major opportunities to buy trashed stocks and sectors. Oversold positions will crystallise themselves for patient investors. They will choose their moments to buy in to fundamentally strong businesses. Where, you might well ask.
There will come a time when large oil moguls will become irresistible with their massive dividends. The Saudis, Iran, Russia must be close to stop playing their political games, with oil below $28 a barrel unprofitable. If not bank regulators and the banks will step in to deal with gargantuan non-performing loans to the energy sector.
That being the case oil could be $50 a barrel by December 2016. Within the FTSE 350 there are insurance companies, property organisation and selected technology stocks that will look ludicrously cheap. Also keep an eye on the mining and resource sector. Many constituents have lost 80 per cent in value.
Also in the event of financial Armageddon, Central banks will be there to play a major role and if needs be. They will not hesitate to use whatever monetary and fiscal measures they need to bring back stability. Whilst uncertainty prevails, the inevitable flights to quality will be made – gold, the Swiss Franc, Yen, "Kiwi Dollar", the "Looney" and residential property, not forgetting the very liquid Treasury and Bond markets. Nil Desperandum.
All is not lost.