Blog: Dave LeggettOne eye on shares...

Dave Leggett | 27 February 2007

I guess many people will be watching global stock markets quite closely over the coming days. There has been a bit of a slide and no single thing is responsible, apparently. There are several culprits. Are Chinese stocks overvalued, is the US serious or merely sabre ratling with Iran and is the outlook for the US economy worsening?

To take the last first, the doomsayers have been busy on the US economy for a while now. But it has proven pretty resilient, in spite of domestic concerns over house prices and interest rates. The fundamentals, in terms of domestic demand, don't look too bad. Even the trade deficit is okay if someone can pay for it. And a weak dollar hasn't done too much damage either (it's been so weak for so long, that the US economy hardly imports inflation, but a weak greenback also keeps US exports competitive on world markets).

Investors in the US will no doubt be cheered by the news that Toyota is stepping up its US investment. They play a long game at Toyota. If Chrysler looks like a mess by comparison, well, it's only a part of the story - part of the ebbs and flows of companies and industries. And Chrysler has still to be played out. It could emerge stronger as part of another company, or still within DCX or even as a spun off entity. I doubt that it will disappear.

Are the fundamentals worsening in China? I don't think so. As stocks have hit record highs, there have been some jitters. There are rumours that the powers that be want to dampen things down. And the rumours have done just that (do they have spin-doctors in Beijing - if so, they seem to know what they are doing). 

China has already unlocked a lot of pent up demand. It's the Olympics next year, too, and China will want to present a modern, dynamic image to the world. There's a hunger and momentum to the Chinese economy that even the most conservative politicians must recognise is increasingly hard to resist.

Iran? Pick up a newspaper and look at the news in Iraq. Even if there comes a point at which people will say that a nuclear and belligerent Iran is bad for regional stability and so something needs to be done militarily, that point seems some way off. Plans aired in the media and a military build-up keep the pressure on though. It's a tweaking operation. 

Oil prices look subdued, too. It could be an awful lot worse on that front.

We just have to hope that investors - the fund managers gambling with our pensions, especially - can keep their heads and that sell-mania doesn't take hold. Market psychology can get a momentum and a life of its own pretty quickly (remember the 'emerging markets contagion' of a few years' back?). For what it's worth, I don't think this has the look of a bubble about to burst.

But if it did, the consequences would be severe.

Due to proliferating international economic linkages and increasingly global financial markets, what happens in China now can impact us much more than it would have done just five years ago.

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