Grigoriy Burenkov: 'A perfect storm has taken shape for correction of markets'
By the looks of it, the early August seemed to be a catastrophe for the global economy. The stock markets made it through one of the biggest collapses for some time passed, which many have branded the "Black Monday". There were very good reasons for
By the looks of it, the early August seemed to be a catastrophe for the global economy. The stock markets made it through one of the biggest collapses for some time passed, which many have branded the "Black Monday". There were very good reasons for that.
On August 5, Japan's Nikkei 225 index fell by 4,451.28 points during the 24-hour period, a record-setting decline since the "Black Monday" of October 20, 1987. The American indices NASDAQ Composite и S&P 500 came tumbling down by 6.35 % and 4.27 % at the start of trading. The Asian and European markets dropped. The rates of the key cryptocurrencies crumbled along with them. The Bitcoin price instantaneously declined to less than $50,000, while Ethereum fell by 15.3 % to $2.3, a record-breaking decline since 2021. The crisis scale in its onset was mind-blowing. The mass media started talking about a possible global downturn. However, the following correction of the economic performance features defeated the panic.
To gain an insight into what caused that crisis and its consequences, The Malta Independent approached and talked to Grigoriy Burenkov, a Cypriot financial analyst, the founder of Wheelerson Management Ltd, and the owner of Osome Group.
- Until quite recently, a number of media outlets mentioned that the "Black Monday" might well turn into a "bloody August", referring to a likely global downturn.
- Indeed, there was quite a serious situation that emerged in the global stock markets at that time. However, it did not prove to be unique. My guess is that a global correction took place after a fairly lengthy period of growth against the backdrop of specific Asian factors.
Nevertheless, the fundamental economic performance features remain relatively stable in most countries. The stock markets started to recover as early as on the next day following the decline. The US FRS made it clear that the United States was not going to slip into recession. Therefore, it makes no sense to talk seriously about a "bloody August' now.
As a matter of fact, comparisons with the 1987 crisis are only appropriate in the context of the scale of a one-day market crash. No more than that. After all, now the markets have more liquidity and better regulatory mechanisms and risk management systems. At the same time, one should not forget that the financial regulators of the countries likewise have a wider crisis stabilization toolkit.
- The analysts at Bloomberg believe that what caused the "collapse that wiped out trillions of dollars in the global equity markets" were the fears of the US economy slowing down due to recent macroeconomic data being weak and a policy change by Japan's central bank.
- I agree that those are the key factors of the August crisis. But, as I see it, there are also other reasons that had an impact on what happened one way or another. Among them, for example, is the overheating of the technology sector, especially as concerns artificial intelligence. The recent rise in the stocks of AI-related companies has been unprecedented. And such a rapid rise almost always leads to a subsequent correction.
Among the other factors that had an impact was also the suboptimal Chinese macroeconomic data which indicates that country's industrial and GDP dynamics is deteriorating. Also, one should not forget the difficult geopolitical situation. The rising tensions in the Middle East and the ongoing Ukrainian conflict have likewise contributed to uncertainty for the global markets. At the same time, the logjam of issues in the supply chains are generating risks for the manufacturing sector, as well.
All of those and other lesser factors combined to create the already familiar "perfect storm" for market correction that we saw in early August. Here I agree with many experts saying that this is a classic scenario when the accumulated risks and imbalances start revealing themselves simultaneously, thus reinforcing each other.
The key factor in the near term will be the ability of the central banks and governments to respond adequately to the current challenges and prevent the correction from escalating into a full-blown crisis.
- The Chinese market proved to be one of those that demonstrated the highest resistance to the August collapse. The local Shanghai Composite index declined by as little as 1.5 %. How can you explain such relative stability?
- The relative resilience of the Chinese market is due to a combination of several factors. For example, the fact that it already experienced a significant correction last year, especially in the technology sector. Many stocks were trading at a significant discount, limiting the potential for any further decline.
At the same time, state-owned enterprises and domestic market-oriented companies have a large share in the Chinese market. This makes the local stock market less sensitive to global economic fluctuations. There is also a system of quotas and capital controls that provides protection from them.
The Chinese authorities have a significant arsenal of market stabilization tools. When the going gets rough, the state does not hesitate to use those tools to maintain stability. Investors expect the Chinese government to introduce extensive stimulus measures if the economic situation deteriorates significantly. This creates a certain "safety cushion" for the market. The recent statements by the authorities on supporting the economy and the stock market nothing but strengthen those expectations.
- Grigoriy, how would you comment on the dynamics of the cryptocurrency rates - the Bitcoin, in particular - during the crisis? Following an almost 15 % decline, it did not wait long to recover to $60,000.
- On that point, I fully agree with those analysts who say that the fall of the digital currencies was caused in part by the fact that the carry-trade strategy had been phased out, which is essentially about the interest rate difference between the yen and the other currencies. The interest rates increased by Japan's central bank resulted in a massive outflow of capital which eventually had an impact on the cryptocurrency market.
The high volatility confirms that the cryptocurrencies are not perceived yet by most investors as a "safe haven" or "digital gold". When the market is panic-stricken, they are susceptible to the same fluctuations as the traditional high-risk assets. However, the rapid recovery of the Bitcoin rate shows a growing investor interest in alternative assets during the periods of volatility in the traditional markets. One should not be forget that the present-day technological infrastructure of the cryptocurrency market allows you to respond quickly to changes in sentiment.
Overall, one should realize that the role of the digital currencies in the global financial system is still taking shape. A fairly large amount of time will be required yet to observe their response to a variety of market cycles and crises in order to understand the true place of the cryptocurrencies in investors' portfolios.
- Grigoriy, coming back to the possible global recession question, what is your assessment of its probability in the near future?
- At the moment, the likelihood of a global recession does not seem high to me. The key economies, especially the US, are showing certain resilience. I think the probability of a recession in the next 12 months is unlikely to exceed 25 to 30 %.
- Crises like the one in early August have happened and will certainly continue to happen. What advice could you, Grigoriy Burenkov, as an experienced financier, give to private investors on how to proceed in such situations?
- For cases like this, a quotation from Warren Buffett is probably best suited: "The financial market is a device for money redistribution from impatient investors to patient investors." During such crises, the main thing is not to panic and not to make impulsive decisions. High volatility periods form an integral part of the investment process. They often create opportunities to acquire high-quality assets at a low price.
Again, the key factor in the near term will be the ability of the regulators and governments to respond adequately to the current challenges. As for investors, they should play it cool, stick to their long-term strategies, and keep a close eye on the developments. Crises come and go, and the markets always find a new equilibrium. The main thing is to manage the risks competently and not to lose sight of long-term prospects.
Grigoriy Burenkov, a Cypriot financial analyst and opinion writer, the founder of Wheelerson Management Ltd and the owner of Osome Group.
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Grigoriy Burenkov was interviewed by John Ciuffa. The editorial desk was not involved in the creation of the article.
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