Still no light?
As the week draws to a close, Jeremy Gardiner, director at Investec Asset Management, takes stock of the financial crisis.
As I said in my previous notes, predictions at this stage are futile, so I will continue to focus on the two questions most frequently being asked at the moment:
- What is driving markets?
- What can we look forward to?
What is driving markets?
We have seen expensive bailout packages in both the US and the UK; we have seen globally synchronised rate cuts and still the selling continues. A couple of features are driving this. Essentially, the world needs a co-ordinated response as soon as possible. Although the US bailout bill went through, once the politicians were finished with it, it was not as effective as the package that was first presented. In addition, Hank Paulson is being accused of making it up as he goes along.
He talks of buying up tarnished assets, but at what price? Then he talks about taking equity in companies. Although he managed to get the Bill passed, markets however need clarity on the specifics if they are to believe in its potential to succeed. The rate cut helps a bit, but won’t fix the problem, as the problem in the world right now is not the price of credit, but the availability thereof and the willingness of banks to part with any cash.
The British rescue Bill appears the most effective, as it addresses three major issues and with large amounts of capital. It addresses the issues around banks needing capital, it provides liquidity and it guarantees the short term debt of banks so that interbank lending can improve.
Is there any hope left?
Yes, there is an emergency G7 meeting called for this weekend to discuss the crisis. What we need from this is a global response to the crisis, across America, Europe and Asia. This should include a clearly articulated plan (along the lines of the British rescue package), across all countries affected, along with possibly another globally synchronised rate cut, hopefully emerging by Sunday evening.
Interestingly, the South African financial system is in relatively good shape. In a report issued today by the World Economic Forum, the SA banking system ranks 15th in the world, one ahead of Switzerland at 16th, with the US and the UK not even in the top 20.
The short-term catalyst to watch for in terms of the markets improving are the global credit spreads. And without saying it too loudly, there are just the first very tentative signs emerging of these risk indicators starting to ease. Don’t hold your breath, but this may just signal the beginning of better times ahead.
As we have stated before, investors should be careful of making emotional decisions during extraordinary times. It is times like these that illustrate clearly (and sometimes painfully) the benefits of portfolio diversification (or lack thereof). This is exactly why portfolios should be structured according to the individual investor’s specific risk profiles. For those who sacrificed some of the upside when times were good, the fact that they were properly diversified means that the current turmoil – although uncomfortable – shouldn’t be too painful.
