October’s downturn in stock markets could be a blessing. Most markets haven’t yet crashed in a way that is damaging to economies (except in Asia) but the falls were a timely reminder that prices go down as well as up. Barring a more severe shock, the effects of the volatility could be benign. A saner approach by investors and capital raisers is expected.
This is especially needed in emerging markets, particularly from bond issuers. The widening of bond spreads because of falling stock prices means that borrowers may stop demanding the impossible from their lead-managers. A string of deals at unrealistic prices has made new issuers arrogantly dismissive of investor concerns.
Equity issuers, too, have been warned that a booming market might not always be there to cover up their mistakes. Private-equity funds, used to paying over the odds for companies and still delivering multiple returns on listing, may have to rethink. M&A departments will still be busy, but wilder excesses, as seen in the battle for MCI, may be curbed.
There is still a lot of cash about and the complacency of issuers has been fed by an easy supply of funds. October’s turbulence seemed to affect the professional more than the retail investors: they were the ones who panicked and suffered the most. US hedge fund Niederhoffer Investments collapsed and Soros Fund Management lost $2 billion. But small investors didn’t embark on large-scale redemptions as the US mutual fund industry had feared. Greater sophistication among fund buyers and innovations, such as 401K pension plans that allow 24-hour telephone trading and switching between bond and equity funds, contributed to an air of calm. For many, the stock market routs were a buying opportunity.
But on a global scale new outlets are desperately needed for investors’ cash to counterbalance the obsession with equities. If the worldwide growth of funded, privately-run pension schemes and other new forms of savings is to continue, then new ways are needed to channel funds into capital-hungry companies and countries. The development of a high-yield corporate bond market in Europe offers one outlet but others must be found.
