Knockdown prices in equities garage sale
IS THIS Armageddon or just a blip on the financial markets map we’ll look at in five years’ time and say: “Remember that?” It all seems pretty bad, but at times like this commentators – even level-headed, boring analysts – explore new depths of rhetoric usually reserved for end-of-the-world science fiction writers.
But it probably is the end of the free market world as we’ve known it, at least for a while. “Markets are clearly being driven by fear. This is at least on a par with anything most of us have seen in our investment careers, if not worse,” says Jeff Keen, chief
investment officer at TriAlpha. Keen possibly has a better appreciation than most of the financial crisis currently going down: TriAlpha is part of the international Stonehage Group that counts among its clients banks in the United States, Britain and Europe.
“For the vast majority of our clients with diversified portfolios, the best option will be to ride out the storm over the short term,” says Keen. Well, yes, there really aren’t any other sensible options. But what does scare me is that some normally rational investors are thinking of selling out of equities completely. That’s the irrational fear part: selling now means you make a loss at what could be near the bottom of the cycle.
But that’s also debatable. What seems different this time is that investment professionals who reassured us earlier this decade to keep calm because the market would come back – as it did – now don’t seem so sure. Nobody is confidently saying we’re over the worst.
However, Paul Stewart, MD of Plexus, offers a little hope. Locally, he’s well placed because Plexus has been closely watching the US economy since 2006, due to its relationship with John Mauldin, of Research Affiliates. He was one of the first well-known investors to warn about the looming collapse of property prices in the US and the sub-prime credit crunch.
Says Stewart: “Analysts tend to be too optimistic, or pessimistic, at inflection points. Overall, the US economy isn’t in such bad shape. Clearly, banks are in trouble, but manufacturing output is still up. And now we have the US$700bn rescue package from the Federal Reserve, showing the authorities have the appetite for a fight. The question now is whether the market is happy with the package and how it’s implemented. If done properly I think recovery in the US will be quick.”
The Fed had no option but to intervene. However, it completely undermines what I always understood to be the free market system. It’s a ruthless system but does tend to weed out the baddies – people who’ve been too greedy or made bad decisions.
Now we’re seeing banks that indulged in what we now know was reckless lending being bailed out with US taxpayers’ money. And the application has so far been very inconsistent. The administration bails out admittedly big but irresponsible mortgage lenders then leaves Lehman Brothers to collapse. Then it props up AIG, because one of the world’s largest insurance companies can’t raise capital on its own due to its collapsed share price. The logic escapes me.
To top it all, stock exchanges in the US and the London Stock Exchange “ban” short selling. So the greedy investors who enjoyed the run-up to the sub-prime saga receive protection when they should lose their money. And the bears that saw that coming and sat on the sidelines are now prevented from moving in and making their money.
But what more could this mean for our market, which has already been hit with every other emerging market by the meltdown in the US? “In the bigger scheme of things I think the effect on our market will be relatively small. Our financial institutions will survive and some are offering good value now,” says Stewart.
SHAUN HARRIS firstname.lastname@example.org