Our stock market is in cheap territory and somewhat overdue for a big rally

Paul Hansen, Group Director, Retail Investing of Stanlib writes that global conditions are worsening. He quotes BCA Research house from Canada who point out that global economic risks are predominantly to the downside given adverse feedback loops between credit markets and activity.

BCA say that this is no more evident than in the shipping industry, where the Baltic Shipping Index has fallen 93%. Bad news is feeding upon bad news as one negative spawns a bunch of other negatives, almost as if the economic system is unraveling.

US Treasury Secretary Henry Paulson's about-turn on buying toxic debt from banks is a sign that his plans are fading fast. Capital markets (share and bond markets) have already priced in a recession in the developed economies and a considerable slowdown in the emerging economies. But corporate news should be poor in the months ahead, with earnings forecasts slashed repeatedly. Currently global share prices are building in a 30% decline in company earnings according to BCA. If earnings fall by, say, 45%, then share prices could still decline by another 29%.

BCA reckon the deteriorating economic landscape argues for caution toward shares and corporate bonds, despite valuations that seem appealing on the surface. Corporate earnings estimates are set to be cut severely and negative news-flow will be a repeated hurdle for shares.

The de-leveraging (reducing debt) cycle could mean that economies may take years rather than months to recover. As the CEO of Merrill Lynch, John Thain, said recently: ¯The global economy is entering a slowdown of epic proportions comparable with the period after the 1929 crash.

The ALSI Top 40 Index shown above (down 4% by 1pm on Monday) is rapidly approaching its low of 16,670 recorded on October 27th. There is a possibility (and hope) that it stops falling around this level, thereby establishing the ¯double bottom from which a good rally normally ensues. Certainly, as mentioned in previous weeks, our stock market is in cheap territory and somewhat overdue for a big rally.

However, it is concerning that Billiton reached a new low today (down 55% in rand terms, 69% in dollar terms). Anglo American is also trading at a new low today (-66% in rand terms or 74% in dollar terms). In dollar terms, Anglo has fallen from over $70 per share in late 2007 to under $20 today (2003 and 2004 levels). Uncertainty abounds.