canoe.com
October 2, 1998
FOCUS-World's wealth decimated by market slump
LONDON, Oct 2 (Reuters) - At least $4.3 trillion of wealth has been destroyed by the turmoil engulfing financial markets and the feel-bad factor is hitting the world economy.
By Friday, that total -- greater than the annual gross domestic product of France or Germany, and more than half that of the United States -- had been wiped off stock market values worldwide in little more than two months.
"The collapse we have seen in stock markets is going to have a big effect on what people can go out and afford to spend," said David Brown, chief economist at Bear Stearns International in London.
The worry, especially in the United States, is that consumers are now cutting back on spending. This, in turn, may further slow the economy and hurt company earnings.
Calculations by HSBC Securities European strategist Sharon Coombs reveal the extent of the market carnage. She said the $4.3 trillion total was based on global market capitalisation since Wall Street hit an all-time peak on July 17.
And the carnage shows little sign of abating, with Germany's bourse down as much as seven percent and London as much as three percent on Friday. U.S. blue chip stocks started the day weak again, but by 1535 GMT the Dow Jones industrial average was little changed at 7,637.
Economists also say collapsing consumer confidence could lead to a deflationary spiral. U.S. data this week showed the biggest fall in consumer confidence since January.
The U.S. consumer is saving virtually nothing -- just 0.6 percent of disposable income in the second quarter, said Albert Edwards, global strategist at Dresdner Kleinwort Benson in London.
This in large part had come about because consumers believed their shareholdings would provide them long term economic safety. This paper wealth underpinned a massive buying binge in the United States.
"The U.S. has a major economic problem," Edwards said.
"Consumer confidence is collapsing. If that brings the total savings ratio back to the 4.5 percent of a couple of years ago the U.S. will be seeing a deep recession."
The link between stock market falls and consumer behaviour is far less strong in Britain and Europe, analysts say, where the man in the street is far less likely to own shares directly.
Only five percent of Britons own mutual funds, and still less in Europe, compared with 37 percent of U.S households.
Coombs of HSBC said her research has shown little relationship between stock market and consumer behaviour in Europe. But in Britain, where the City of London acts as a financial engine, market falls
have already turned into job losses which could damage the economy.
In Europe, three banks -- ING Barings, Robert Fleming and Daiwa Europe -- have announced layoffs this week. The markets are abuzz with talk that many more job losses are soon to come.
"It doesn't take too many hits on people with expensive mortgages to start to drag down (real estate) prices," said Brown of Bear Stearns. "If we see more ING Barings it will hit the consumer sector."
But some analysts think that a slowdown in consumer spending in the U.S. might be no bad thing, even if it hurt company earnings.
"This is not like the 1970s or '80s for most people," said Michael Hughes, director of Baring Asset Management in London.
"I'm not sure we're talking about a deep recession."
U.S. consumers will be insulated from the carnage by low interest rates, which will keep a lid on their mortgage payments, and the low prices of commodities such as gasoline, he said.
But the outlook for shares is still poor, he said.
"It is very difficult to justify a further re-rating of U.S. shares if earnings turn negative. But equally it is important not to get carried away and see this going into freefall. I see 6,000-7,000 as fair value on the Dow."
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