Friday, October 9, 2015

SocGen Model Sees The S&P Crashing 60%..........ANOTHER PESKY FACT!

SocGen Model Sees The S&P Crashing 60%


SocGen decided to model out what what would happen to equities in just such a scenario. In fact, it took it one step further and combined this with what an "EM lost decade", one which increasingly looks more realistic, would look like.

This is what it found:

Our model indicates the US equity market could potentially drop by 30% in the event of an 'EM lost decade' and by 60% in the event of a China hard landing i.e. S&P 500 back to its 2008-2009 lows.


SocGen adds the following explainer:

The 2015 summer sell-off highlighted how nervous the markets are regarding any risk coming from China: the S&P 500 index lost 11% in one week, the Eurostoxx 50 fell 16% and the Nikkei was down 13%. Whatever the scenario (hard landing or EM lost decade), if China's GDP growth were to drop by c. 2% between 2015 and 2016, volatility would jump and the equity market would price in a lack of future growth (i.e. via a spike in the risk premium).

The resultant devastation across global equity markets will mean that more than a US recession, this explains why the Fed's 4th mandate is precisely one that focuses on both Chinese markets and the economy, because suddenly the Fed has realized that the biggest risk to the S&P 500 is not domestic, but one stemming from China whose jugging of a real estate, credit, investment, banking and equity bubble will surely take up all the Fed's resources in the coming years.


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