Are we heading towards another GFC?

A plummeting Australian share market has left the country's leading economists stunned as the extent of the fall stokes fears of another Global Financial Crisis (GFC).

$60 billion was wiped off the value of the Australian share market yesterday in the worst one-day drop since the GFC more than six years ago.

The market closed more than four per cent lower, with further losses expected on the ASX today.

Several European markets sank more than seven per cent in afternoon trades, while US stocks slumped at the open with the Dow and the broad-based S&P 500 index dropping more than three per cent.

China-linked shares led the sell-off yesterday, with Shanghai closing down 8.49 per cent, the biggest daily loss since February 2007.

Such dramatic drops have given rise to fears that another GFC could be on the way.

 

Shane Oliver, chief economist at AMP Capital, told Yahoo7 Finance that the main cause of the ASX drop was the poor performance of Wall Street on Friday, which was then compounded by Asian markets on Monday.

“Wall Street fell just over three per cent on Friday night, so we knew we were going to have a bad opening on Monday [on the ASX] and we certainly had that.

“As the day worn on yesterday, Asian share markets continued to slide, dropping below the lows we saw last month and that gave additional impetus to the decline in Australia.

“It has turned out worse than I first thought and the drop [on the ASX] has been bigger than expected.”

Oliver said while the drop will leave people fearful of another GFC, he believed this is unlikely.

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“The GFC back in 2007 saw a fall of 55 per cent in the Australian sharemarket [value] that was spread over 16 months.

“People are worried about the same sort of drop, but the risks now should be more manageable.

“The GFC was made worse by aspects such as the housing market in the US collapsing and exposing a lot of lenders.”

Oliver added that it will “remain a volatile and messy week for the Australian share market”.

Chris Caton, chief economist at BT, agreed that yesterday’s drop was been worse than initially feared.

“We expected a drop after the performance of Wall Street on Friday, but the drop in Australia has still been greater than we thought.”

However, Caton did not expect the rest of the week to be so harsh in terms of the falling value of the ASX.

“I think there is a chance the ASX might finish this week higher than it is right now. So some investors might be well placed to buy now in anticipation of that recovery by the end of the week,” he said.

“However, I don’t think we need to fear another GFC as the global markets are in a more stable state than before the GFC back in 2007 and should be able to recover from the performance of recent days,” Caton added.

 

Savanth Sebastian, equities economist at Commonwealth Bank, said he expects another four per cent slide on the ASX today.

“If you look at the overnight trading movements, the basic fact is that metal, minerals, resources and oil have plunged quite dramatically,” he said.

“That is all going to filter through to our market [in Australia] and we should see some weakness across the board.”

Sebastian said the markets in Australia are currently trying to get a better gauge on how China is going to recover.

“Fear and uncertainty is ruling the market currently due to uncertainty of what is taking place in China, but it is very unlikely this is the bottom [of the fall],” he said.

 

Finance analyst and Yahoo7 Finance columnist, Michael Pascoe, said the drop is more likely to be a correction in value rather than the start of another GFC.

 

“The stock market in China has been smashed, but it is still up 43 per cent on what it was this time last year,” he said.

 

“It is a wild market in China and it does not reflect the economy there.

 

“What matters for Australia is the fundamentals of the Chinese economy and the likelihood of the Chinese Central Bank stepping in at some stage and providing some [fiscal] stimulus to calm that market down.  

 

“We have had a correction in Australia. How far will it go? Nobody knows, but the question investors have to ask themselves is: ‘are the shares I’m buying good value with sustainable growing dividends?’” Pascoe added.

Also read: Global stocks plunge further on China woes

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