Markets Crash across Europe Experts Warn of Stock Market Hysteria

Markets crashed all across Europe Monday, with Germany's DAX losing 7 percent of its value. But analysts advise against panic -- in fact, they say, now might be a good time to pick up some cheap stocks.

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Five percent, 6 percent, 7 percent: For the German DAX stock market index, Monday was a day of steep falls. A €1 billion loss at the bank WestLB, combined with the fears of a global recession, helped push the DAX beneath the psychologically important 7,000-point mark.

A bad day at the DAX.
REUTERS

A bad day at the DAX.

It wasn't just the DAX which was hard hit. London's FTSE 100 index also fell 4.5 percent, while in Paris the Cac-40 dropped 4.6 percent. Elsewhere the Tokyo Nikkei 225 index fell by 3.9 percent. US markets were closed for a public holiday, however.

Is the DAX now set to keep falling? No, say experts. "It looks dramatic at the moment, but it is not as bad as it seems," Matthias Jörss, head of equity strategy at the leading private bank Sal. Oppenheim, told SPIEGEL ONLINE. "We have gotten used to rising prices over the years -- especially in Germany. Now we are simply seeing a correction."

There had been signs that a crisis was looming. Every investor knew that the US mortgage crisis was bound to have consequences -- the only question was when. "At the beginning of the year, the market hid all the risks," says Jörss. "It was clear that things were first going to get worse before they got better."

One should not assign too much significance to the current dip, Jörss advises. Stock prices, he points out, are not entirely rational. "If you go onto the trading floor and spread a rumor about a share price, then everyone will believe you," Jörss says. He believes that a further decline in the DAX to 6,600 points is realistic. "If there is bad news, then it can of course go even lower," he says. "But actually we are considering writing reports which are more positive than negative. We are slowly finding many attractive stocks." In other words, prices are so low that it could be worth investing at the moment.

'We Are Seeing an Avalanche'

The trigger for the market crash was the news from WestLB on Monday morning. Over the weekend, the bank had to admit to a billion-euro capital requirement because of misguided investments on the US mortgage market. "At first they gave the impression that they had nothing to do with the cheap loans in the US -- and then suddenly €2 billion were missing," chides Jürgen Kurz of DSW, a German association which represents private investors. "That unsettles the market tremendously. The result is panic selling like today." Other banking stocks fell into the downward spiral. "What we are seeing is an avalanche," says Kurz.

The crucial question for investors is: What comes next? Kurz sums up investors' concerns: "Have all the banks revealed all their losses -- or is there still something lurking?"

Nevertheless, Kurz himself appears optimistic. "The situation in the real economy is OK. In addition, there is enough liquidity available, including from, among other sources, sovereign wealth funds." This money is looking for places to invest -- and almost automatically flows into the stock market because of low interest rates.

The DSW therefore advises calm. Private investors could even take advantage of the current stock market trough to slowly start buying shares again. "If you're looking at a time horizon of five to six years, you can't go too far wrong with a solid company," says Kurz. "Weak phases are perfectly suited for investing." Only investors who are absolute pessimists should hold off. "But then you basically shouldn't be buying shares," Kurz says.

Kurz considers banks in particular to be "solid companies" whose share prices will rise again. "Banks will still be around in 30 or 40 years. The existing system cannot get by without them." Of course, banks have a tendency to take high risks, he says. "But the business model in itself works. As soon as the risks are out, the institutions will once again make high profits."

Nevertheless, there are certain lessons which should be learned from the current crisis, says the DSW. "We need more transparency and greater responsibility from boards," says Kurz. In addition, he says, risk management must be improved. "It's not acceptable that a bank can take enormous off-balance-sheet risks within the framework of some kind of special purpose entity. These kinds of bodies should not be allowed to exist." The financial authorities should now introduce a strict regulatory framework, he says.

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