Is it a modest correction or the start of something more significant? The sharp sell-off in offshore markets overnight and the similar fall in our market today — it closed down just over 3% — has ended the three-month rally in share markets, not before time.

The markets had got ahead of themselves. Even if one subscribes to the views expressed by World Bank economist Andrew Burns in his interview with Business Spectator’s Isabelle Oderberg and accept that the global economy is stabilising and could show mild growth in the latter half of the year, there is nothing in the present settings to justify the extent and rate of that rally.

The world remains a dangerous place, and one unpleasant overnight announcement offshore away from another bout of panic and instability. Even without that announcement — even if there is no new dimension to the global financial crisis — after the worst financial and economic experience in 70 years it would be illogical to expect the world to bounce back to something resembling normality after less than three quarters of declining growth.

Even as the global recession rippled — in some instances ripped — through corporate profits and stability, forcing household names into Chapter 11 and wholesale restructurings of companies and industries, the market was sailing along blithely, attributing ever more optimistic multiples to declining earnings.

My colleague, Robert Gottliebsen, regards this as a healthy correction and hopefully he is right and that is all it is. However, whether the sell-off continues, or whether the market moves sideways for some time, the only argument for the market resuming its post-March trend is that the bleak global conditions haven’t got any worse.

One would expect, given the degree of trauma sustained by the global financial system and real economies, that the recession within the developed economies would be more protracted that in most previous recessions — which means, according to Boston Consulting, that it should last at least seven quarters. That would mean a return to growth in those parts of the world most adversely affected sometime next year.

Even then growth should be quite weak. Governments have used up just about all of their firepower to sticky-tape the financial system together and blunt the worst of the recession. Now they have to pay for the trillions borrowed. Already that prospect is pushing up longer term interest rates around the world, which is not good news for equities.

Households are in deleveraging mode, but have got a long way to go. Even the healthiest banks in the global system — the Australian system is probably the healthiest — are scarred and have balance sheet — and therefore lending — constraints.

Even when the economic wheel turns, real financial and economic stability returns and consumers resume spending and companies investing — which could take a while — the legacy of the crisis should act as a throttle on growth.

Peter Fray

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Peter Fray
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