Is This The Start Of Another Financial Crisis?

The market does not seem very positive these few weeks. The Straits Times Index (SGX: ^STI) was down 1% within the first hour of trading this morning. In fact, almost all the markets in the region have been in the red today. The broader question remains, is the recent market weakness merely a correction or the beginning of another financial crisis in the near horizon? Let’s look at the arguments for both possibilities.

Mr. “Correction” View

The USA economy is recovering. The financial institutions are now well-capitalised and the industry is regaining popularity partly due to the lower energy cost. The current drop in the market is just a short-term correction and over-reaction to the declining oil price. As soon as the market realises that the fear is overdone, it will be ready for its growth ahead. The current price-to-earnings ratio of the SPDR STI ETF (SGX: ES3) which tracks the Straits Times Index is only at 13 times, a relatively low level.

Mr. “Doomsday” View

The slump in share prices is reminding some investors of the pre-global financial crisis period. Some see the similarities in the way asset prices, especially properties prices in the Asia-Pacific region have risen to excessive levels due partly to easily available funds and cheap interests rate. The low interest-rate environment might have fuel the growth in the region in an undisciplined manner. The slowdown in China and the shadow banking situation in China might get worse t. Together with the crackdown in corruption in China and the huge drop in oil price, this might just be the preliminary sign to greater trouble ahead. The slowdown in the economy might lead to more defaults in the property market which will only accelerate the collapse.

Foolish Summary

There is no certainty on which point of view is correct. As investors, we have to realize that there are things that are out of our control and ability to predict. However, if we focused on investing in quality businesses over long term, any correction or crisis will only be a temporary dent in your portfolio.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own shares in any of the companies mentioned