German stocks plunging, Hong Kong index nears March 2020 lows...

The waves of bad news just keeps washing over financial markets this week. Germany is seen as the biggest loser and analysts seem convinced that stagflation is the best case scenario for Europe’s largest economy. Avoiding recession in the next 12 months will be a serious challenge.

But who knows, really? People's ability to predict the future has never been the best. The arguments make sense now, but what if (for example) Putin fails and is overthrown, or removed in the same way that many dictators have been in the past…?

Markets rarely wait for confirmation. Based on what we know right now, the future doesn’t look bright for Europe. And that’s reflected in Germany’s stock index.

The Dax is now trading back below the pre-Covid highs. All of those gains through 2020 & 2021 have been wiped out and traders are asking how low this can go now…

On a technical basis, the index is trading way below the 200 and 20 day moving averages, and approximately -18% from the January 5th high. The Dax has fallen by 9.5% this week alone.

This is the performance of a selection Germany’s largest companies since posting their YTD highs:

• SAP -22.3%
• Linde -18.7%
• Siemens -25.8%
• Volkswagen - 29%
• Airbus -19%

And it’s not just European stocks looking dicey. Hong Kong’s index is in freefall too. The Hang Seng peaked back in February last year, and has dropped by ~30% since. It’s now closing in on the March 2020 lows…

The Ukraine conflict and prospect of the Federal Reserve tightening has dominated the headlines this year, and China’s “Lehman moment” (as it was dubbed by the media) has disappeared from view.

As recently as September 2021, the Evergrande crisis sent shockwaves through markets. China has so far managed to contain the fallout, and calling this a “Lehman moment” was never really a fair comparison.

Still, the effects are being felt and the property crackdown has kept house prices in check, although the Chinese property sector is reported to be struggling with liquidity issues.

But it’s the push towards “common prosperity” that has really turned things around for China’s biggest companies. The CCP cracked down on technology firms especially hard, citing concerns over antitrust violations and data security..

This new regulatory landscape spooked investors, and Beijing’s focus on reining in “disorderly capital expansion” fuels that uncertainty.

Then there’s the question of domestic consumption. China has really struggled to sufficiently develop their domestic markets. Chinese GDP growth has relied instead on large infrastructure investments, a property boom and running a high trade surplus with the world.

After the global financial crisis in 2008, Chinese economic growth pulled the world economy forward. Chinese commodity demand is widely credited with helping Australia avoid the worst of the crisis.

But the world has changed now. If this crisis evolves, investors will be asking where the big growth driver is going to come from…

Not investment advice. Past performance does not guarantee or predict future performance.