If you are going to stick your neck out and predict a global stock and property market crash, you might as well go all the way.
That’s what Robert Kiyosaki, author of Rich Dad, Poor Dad, has just done by forecasting “the biggest crash in world history”.
Not only that, he has also put a time limit on it. This month. October 2021. He is warning that Chinese property developer Evergrande is in danger of defaulting on debts totalling $300 billion and this could trigger a global stock and property crash.
Or as he put it in a tweet: “China’s Evergrande Group cannot pay. Valuation of properties fake. Will real estate crash spread to US? Yes.”
The Bank Panic of 1907, the Wall Street Crash of 1929 and Black Monday in 1987 all happened in October. No wonder investors get jittery as Halloween looms.
So, how worried should you be and which asset classes are likely to be hit hardest?
Stocks and shares
Investors should not pay too much heed to the so-called “October effect”, Vijay Valecha, chief investment officer at Century Financial in Dubai, says. “While several of the stock market’s biggest crashes have occurred in October, history also shows the US S&P500 often delivers positive gains during the month, including six of the past 10 years.”
The global economy faces a number of severe challenges right now, including “US-China trade tensions, gathering inflation, tighter monetary policy, supply-side bottlenecks and record high global debt”, says Russ Mould, investment director at AJ Bell.
He believes China will be able to contain the Evergrande crash, but cautions: “If it doesn’t, markets could be in for a bumpy ride.”
The stock market faces plenty of headwinds as the US Federal Reserve considers tapering monetary stimulus this year and hiking interest rates in 2022, Chaddy Kirbaj, vice director at Swissquote Bank, says.
“Tapering may take more time than many expect, but cheap money won’t sustain the current market euphoria for much longer,” he adds.
Inflation is the big worry as the cost of living shoots up amid rising energy prices, supply chain disruptions, red-hot commodities and global food price spikes, Mr Kirbaj says.
“Unless this is transitory, the global economy will fall into stagflation, with stagnant growth and high inflation. This could happen sooner rather than later.”
So, what would all this mean for your portfolio?
Although the crash might not happen, investors should prepare a game plan in case it does, Mr Valecha says. “In a crash, most sectors perform badly. However, others fare relatively well, including utilities, consumer staples and health care.”
If worried, he suggests investors shift some of their portfolios into lower-volatility businesses that are less sensitive to economic cycles and market corrections.
“Whether the economy is shrinking or growing, these companies enjoy steady demand and produce predictable cash flows,” Mr Valecha adds.
Even defensive stocks will fall with everything else in a crash, but they will cushion you from the worst of the sell-off.
A number of specialist exchange-traded funds (ETFs) target defensive stocks, such as the Consumer Staples Select Sector SPDR Fund. For those wanting healthcare exposure, investors may want to consider the iShares US Healthcare Providers ETF.
Mr Valecha also suggests buying the SPDR S&P Oil & Gas Exploration & Production ETF, which should be a beneficiary of the global energy crisis.
“Higher energy costs will hammer industries that consume a lot of power but boost gas, oil and coal producers as winter approaches and demand rises,” he says.
US technology stocks are the biggest winners of the past decade, but could suffer in a crash.
“Stimulus spending has peaked, economic and corporate earnings growth are set to decelerate and the Biden administration has proposed hiking corporate and personal tax rates. None of this will sit well with holders of increasingly pricey technology shares,” Mr Valecha says.
However, this could also present a buying opportunity if there is a crash and Mr Valecha says one option for investors is the Invesco QQQ ETF, which tracks the Nasdaq 100 tech index. “Growth stocks like the tech giants tend to bounce back faster in a recovery.”
Mr Kirbaj also favours defensive utilities, consumer and healthcare stocks with sustainable dividends and is wary of US tech as interest rates rise. “However, tech sectors such as cyber security and artificial intelligence may fare better,” he adds.
Gold is a traditional safe haven in tricky times and you would expect it to shine in a crash.
Yet, the gold price fell slightly over the past month, despite growing jitters. It is down 7 per cent this year to $1,748 an ounce at the time of writing.
But Mr Kirbaj remains bullish and believes the precious metal will prove an attractive store of value as global inflation rises.
Josh Saul, chief executive of The Pure Gold Company, reports a 700 per cent increase in first-time investors purchasing physical gold bars and coins. “Our clients are looking for a safe-haven asset that will protect their wealth amidst growing uncertainty.”
At the same time, he has also seen a 257 per cent increase in clients selling “to provide liquidity for debt and bills that their depleted incomes won’t cover”.
Gold is best viewed as an insurance policy against falling assets such as shares and depreciating currencies, Mr Saul says. “It should prove its worth as uncertainty increases.”
If interest rates start rising and stock markets crash, cash may seem like the obvious beneficiary. The danger is that central bankers will be slow to increase rates, in the hope that rising prices are transitory, so the value in cash will fall even faster in real terms.
Mr Kiyosaki suggests that investors might like to keep some cash handy to buy bargain stocks in the aftermath of the upcoming crash but others are more sceptical, including Mr Kirbaj.
“Although bond yields are rising, we aren't considering cash as an investment for now,” he says.
Bitcoin is enjoying yet another resurgence, busting through the $50,000 barrier to trade at around $55,000 at the time of writing. Could a new all-time high be in sight?
The recent rally is impressive given China's tightening of regulations surrounding cryptocurrencies, says Fawad Razaqzada, market analyst at ThinkMarkets.com. “Bitcoin is possibly being seen as a tool to hedge against inflation, a safe-haven asset independent of central bank control,” he says.
Investors also hope that more countries will adopt cryptocurrencies over time and China might have second thoughts when digital currencies become more established.
“Some are betting that Brazil might be the next country to embrace Bitcoin as legal tender, after El Salvador. That would be a monumental moment, given that Brazil is the 12th-largest economy in the world with a huge population of more than 200 million people,” Mr Razaqzada adds.
Mr Kirbaj is also a Bitcoin bull. “More traders and long-term investors will bet on Bitcoin and other cryptos, including ETFs and structured products, as confidence in the traditional monetary system is fading,” he says.
The US dollar is holding firm and that should continue, says Matt Weller, global head of research at Forex.com.
US bond yields are rising as investors anticipate higher US interest rates. “Two-year Treasury bonds have one of the best correlations with the US dollar and yields are now testing 0.28 per cent, their highest level since the onset of Covid-19 last March. They are up 10 basis points from the start of September,” Mr Weller says.
Two-year Treasury yields have since crept up to 0.30 per cent, which may seem low but marks an 18-month high and more could be in store.
If the trend continues, the greenback could get stronger from here.
Rising inflation is bad for bonds for two reasons. First, bonds pay a fixed income and this will look less attractive if investors can get a higher return from other lower-risk assets such as cash.
Second, as yields rise, bond prices fall, which means investors get less back when their bond finally matures.
At one point, more than $15 trillion of global bonds were trading on negative yields, which meant investors were paying people to look after their money.
Those days may be drawing to a close if interest rates rise to curb inflation, Althea Spinozzi, fixed-income strategist at Saxo Bank, says.
The question is how soon the Fed acts. “So far, it has decided inflation is transitory and held interest rates low, supporting bonds,” she adds.
The longer central bankers wait before pulling monetary support, the more aggressive they will need to be, Ms Spinozzi says. “This could provoke an unexpected rise in real yields that will increase market volatility and put weaker corporate bond issuers at risk.”
Bonds are traditionally seen as a safe haven in a stock market crash, but this time they could be right in the firing line.