When Paranoia Takes Over

Equity markets all over the world plunged yesterday after a sell-off in Shanghai and Shenzen triggered a massive drop in Wall Street not seen since the 9-11 attacks, reverberating across the world, including the PSEi. New York fell 3.3% after an almost 9% nosedive in China. PSEi dropped 8%.

A fully-globalized world economy is out in full display here as relatively small, emerging but highly speculative Chinese equity markets made its impact in the world's biggest stock market, New York.

What happened was really a case of investor nervousness borne out of paranoia typical of people who have no clear grasp of investment fundamentals. The Chinese markets were up for a correction anyway, mainly because the high prices were driven by speculation, back-door deals and illegal trades, to begin with. Shanghai and Shenzen exchanges, in fact have more in common with Macau and Las Vegas casinos than with Dow Jones or the Nikkei.

There is no denying that China currently drives much of the global growth. In fact, prices of oil, steel, durable goods and equipment owe their current levels to China's insatiable appetite to fuel its rapidly industrializing economy. And so, when Chinese authorities announced a clamp down on highly-corrupt and suspect trading practices at both exchanges, naturally, market punters got nervous and fled the market.

Overseas markets, especially the US where a lot of companies now have huge exposure in China, misread what transpired in Shanghai and took this to mean that the Chinese economy might be heading southwards soon.

It came at a really bad time when unimpressive US housing statistics and the bombing in Afghanistan near where Dick Cheney was billeted added to the panic. It progressed to a frenzied pessimism when a seemingly innocuous statement made by former US Federal Reserve chairman Greenspan about a possible recession in the future was taken out of context.

Here in Manila, since foreign funds dominate equities, investors took their cue from New York. Consequently, PSEi suffered a massive setback as well.

But I believe Philippine corporates do have sound fundamentals to back it up. A low interest rate-low inflation-strong peso-narrow budget deficit scenario bodes well for this country. Let's just hope the politicians won't mess this up.