Global equity market collapse possible if investors complacent

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KUALA LUMPUR: The world’s stock markets could see a repeat of the crash in the 1930s if investors become too complacent and rely too much on central banks to step in with their stimulus programmes whenever the stock market gets jittery.

This is because complacency opens up a “corridor of vulnerability” among investors, which may lead to such a crash, said Thailand-based investment advisory firm MBMG Group managing partner Paul Gambles.

On Oct 29, 1929, the Dow Jones plunged 23% and the market lost between US$8 billion (RM29 billion at the current exchange rate) and US$9 billion in value, which led to the worldwide economic crisis in the 1930s that was known as the Great Depression.

“We are in a condition now where a 1930s-style stock market collapse may occur again, with record high margins and apparent geopolitical risks,” said Gambles during his presentation yesterday at the three-day 2015 APAC Investments Summit organised by Marcus Evans. The summit ends today.

He was speaking at a session titled “Potential and Risk: Exploring a global and regional view of the equity markets with a focus on the world’s two largest economies”.

Gambles said that he does not know what the exact trigger for a potential collapse would be, but noted that investors need to factor risk management into 80% to 90% of their investment portfolios.

“In the 1920s and 1930s, there were a lot of stock-buying programmes that happened. Despite those programmes, there was still a stock market crash. I’m not saying that history will repeat itself, but we have the same kind of monetary and fiscal policies that were in place then and I would expect the US Federal Reserve (Fed) to intervene should there be a crash in the US stock market,” he said.

However, Gambles said that there is a possiblity that the sheer weight of the crash may be too much for the Fed to bear.

On instrument tools that investors can look into, Gambles said it would depend on each individual’s investing objectives, but there is still a place for equity investment despite the earlier downsides he mentioned. “There are a lot of ways investors can protect their investments, for example, by using minimum volatility exchange-traded funds (ETFs), which are ETFs by main ETF providers that slice out volatile stocks from one’s portfolio.

“[Minimum volatility ETFs] are like ETFs’ attempt at creating a value porfolio that captures some of equities’ upsides while reducing the downsides,” he said.

The Edge Media Group is the media partner of the summit.

 

This article first appeared in The Edge Financial Daily, on April 22, 2015.