Global Stocks Drop 20% Into Bear Market as Debt Crisis Outweighs Profits

Stocks fell, pushing the MSCI All- Country World Index of 45 nations into a bear market for the first time in more than two years, after the worsening European debt crisis and threat of a U.S. recession erased more than $10 trillion from equities since May.

The MSCI index, which slipped 0.3 percent as of 1:33 p.m. in Hong Kong today, has lost more than 20 percent since peaking on May 2, meeting the common definition of a bear market. It tumbled 4.5 percent to a 13-month low of 277.38 yesterday. The MSCI World (MXWO) Index of shares in developed nations also fell into a bear market yesterday, plunging 4.2 percent. The MSCI Emerging Markets Index reached the 20 percent threshold on Sept. 13.

The world is poised for a financial crisis, Mohamed El- Erian, chief executive officer of Pacific Investment Management Co., said in Washington yesterday. Finance chiefs from the Group of 20 nations pledged late yesterday to address “heightened downside risks” to the global economy, echoing language used by the Federal Reserve on Sept. 21 when it announced a $400 billion plan to spur growth as the recovery from the worst contraction since the Great Depression falters.

“The market is pricing in a recession,” said Ng Soo Nam, the Singapore-based chief investment officer at Nikko Asset Management Co., which oversees about $154 billion. “Stocks are looking cheap, but it will take a lot of courage to believe that. Things could get worse. The risk of a sovereign-debt default in Greece is the most significant concern.”

Valuations Sink

The MSCI All-Country World Index has retreated 19.8 percent since July 22. It fell after Standard & Poor’s cut the U.S. credit rating following a debate over raising the nation’s borrowing limit, speculation Greece will default intensified, and Chinese inflation accelerated to a three-year high. The slump pushed the price-earnings ratio for the index down to 11.4, the lowest since March 2009 and 46 percent less than the 16-year average, data compiled by Bloomberg show.

The Standard & Poor’s 500 Index extended its drop since its peak on April 29 to 17 percent. The gauge has retreated even as analysts raise projections for 2011 profit to a record $99.34 a share this year from $98.73 on April 29, according to the average analyst estimate in a Bloomberg survey.

Benchmark measures for five out of 24 developed markets haven’t posted a 20 percent slump from their highs: the U.S., U.K., Canada, Singapore and New Zealand, according to data compiled by Bloomberg. Eight out of 21 developing nations aren’t in bear markets, including South Africa. The MSCI Emerging Markets Index has retreated 27 percent since its 2011 high on May 2.

Europe, Asia

The 15 national stock gauges with the biggest losses since the MSCI All-Country World peaked on May 2 are for European countries. Greece’s ASE Index has lost 42 percent, Italy’s FTSE MIB Index has plunged 40 percent and Hungary’s Budapest Stock Exchange Index has retreated 38 percent.

Policy makers are “committed to a strong and coordinated international response to address the renewed challenges facing the global economy,” G-20 finance ministers and central bank governors said in a previously unplanned statement in Washington. Many urged Europe to implement a July promise to expand the powers of a rescue fund, Japanese Finance Minister Jun Azumi said.

The Euro Stoxx 50 Index has tumbled 28 percent since July 22 as Greece edged closer to defaulting on its sovereign debt and the cost of insuring western European countries’ loans rose to records. The MSCI Asia Pacific Index has fallen 19.7 percent since its 2011 high on May 2. China’s Shanghai Composite Index has tumbled 23 percent since its peak in November, and Japan’s Topix has slumped 25 percent since April 2010.

Bad Ending

“Europe is going to continue to unwind and eventually end up badly for the global economy,” Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc., which oversees $4 billion, said in a telephone interview. “There are so many questions, so many uncertainties.”

The 20 percent decline in global equities ended the bull market that began in March 2009. The MSCI All-Country World Index climbed as much as 107 percent during the rally. The measure avoided a bear market in 2010, when it fell 16 percent between April 15 and July 5. The index rebounded after Federal Reserve Chairman Ben S. Bernanke foreshadowed $600 billion in bond purchases meant to prevent deflation and stimulate growth at an Aug. 27, 2010, meeting in Jackson Hole, Wyoming.

Financial stocks, which posted the biggest losses in the last bear market, are leading declines again amid growing concern that European banks will have to write down their holdings of government debt. Banks, brokerages and insurers in the MSCI All-Country World have collectively lost 31 percent since May 2.

SocGen’s Slide

Societe Generale SA of Paris has retreated 66 percent since May 2, the second-biggest loss among financial stocks in the MSCI All-Country behind Athens-based EFG Eurobank Ergasias. UniCredit SpA, based in Milan, has retreated 62 percent. Banks in Europe hold 98.2 billion euros ($132 billion) of Greek sovereign debt, 317 billion euros of Italian government debt and about 280 billion euros of Spanish bonds, according to European Banking Authority data.

Financial companies in the worldwide index sank 77 percent during the last bear market as government bailouts rescued the biggest U.S. banks from collapse and Lehman Brothers Holdings Inc., once the nation’s fourth-biggest securities firm, filed the nation’s largest bankruptcy in September 2008.

More than $37 trillion was erased from global equity values in the previous bear market that lasted for 16 months after the MSCI All-Country World peaked on Oct. 31, 2007. The index fell as much as 60 percent amid the first global recession since World War II and more than $2 trillion in losses and writedowns at financial companies worldwide after housing prices dropped.

“We could be on the eve of the next financial crisis,” Barton Biggs, managing partner and co-founder of hedge fund Traxis Partners LP in New York, said during a Bloomberg Television interview with Matt Miller and Carol Massar yesterday. The firm has $1.4 billion in assets. “We shouldn’t be because there are things that could be done to avert it, but they haven’t been done. There’s no signs that the authorities are going to do them.”

To contact the reporters on this story: Lynn Thomasson in Hong Kong at lthomasson@bloomberg.net; Michael Patterson in London at mpatterson10@bloomberg.net

To contact the editors responsible for this story: Nick Gentle at ngentle2@bloomberg.net; Nick Baker at nbaker7@bloomberg.net; Gavin Serkin at gserkin@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.