What cri­sis?

Knock­down prices in eq­ui­ties garage sale

Finweek English Edition - - Private Buy -

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 shaunh@fin­week.co.za

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