Jan 10 2008
Many investors could be forgiven for feeling unsettled at the start of 2008, having endured a tumultuous 12 months in which the collapse of subprime lending in the US caused confidence to plummet right across the financial sector. Head of asset allocation at Barings Percival Stanion has commented that the economic outlook for the new year is mainly dependent on "how quickly banks are prepared to start lending funds to each other again" - something many institutions have remained reluctant to do in light of the continuing fallout from liquidity problems in the credit markets and a rapidly slowing property sector. Is the pre-Christmas chill set to extend into the early months of 2008 as investors continue to play it safe with their assets, or will the new year bring a fresh perspective and renewed confidence across global markets?
"Don't throw in the towel yet," David Shairp of JPMorgan Weekly Stock Market Report urges in his weekly strategy report for January 7th. While admitting that conditions remain tight in the US and Europe, with earnings momentum dropping away, he identifies several "straws in the wind" which warn against an overly negative approach and suggest that the start of 2008 could usher in some genuine market changes. Chief among these are the "signs that the interbank markets are thawing", while valuations remain supportive and equity risk premiums at a high level.
Mr Sharp concludes that the dawn of a new year should offer "scope for reflection" rather than prompting frenzied activity or cautious withdrawal. Turning his attention to the eurozone, he notes that conditions are still "restrictive" there because the elevated level of the euro has begun to impact on growth, suggesting that Asian and emerging markets remain a more inviting prospect.
The Barings Global Weekly Review casts a similarly wary eye over the European market, stating that recent economic data for euroland is decidedly "mixed". However, investors can perhaps take heart from the fact that the German market - the largest of the region - has "proven resilient in spite of strong economic headwinds", with unemployment dropping to a six-year low last month.
In the Barings World Market Monthly Review, the outlook for the UK is dominated by the state of the property market. With various surveys recording steady falls in prices for the last quarter of 2007, the implication is that the overall economy is heading for a slowdown, although the Royal Institution of Chartered Surveyors (Rics) has stated that factors such as strong buyer demand and lower interest rates will underpin the housing sector and prevent any extended drop in prices. Nevertheless, there can be no doubt that concerns over the long-term outlook for property continue to impact on investor confidence in the UK, particularly in light of recent comments from Rics about the frailty of the commercial property sector, which was hit hard in the latter stages of last year.
According to Barings, sterling was "by far the weakest" of the major currencies during December and is yet to show real signs of improvement, while the failure to find a buyer for troubled lender Northern Rock and resolve the major financial crisis of last year continues to cast a shadow over the forecast for 2008.
Returning briefly to Percival Stanion's Barings Monthly Asset Allocation Views, he also recommends a careful approach for the new year but does sound a hopeful note by stating that the recent central bank intervention could "ease congestion in the world's money markets".
However, he concedes that such actions usually have a delayed impact, suggesting that investors should proceed with caution in the short term, particularly in the UK, which now has "the highest risk of a recession out of all the western economies". As a result, Mr Stanion expresses concern about the immediate prospects for bonds and equities in the domestic market.
The Invesco Perpetual Monthly Market Roundup Overview observes the market conditions of November 2007 and also comments on the "continued pre-occupation with the effects of the liquidity squeeze on economic activity and corporate profitability" among global investors.
Focusing on events in the US, the report welcomes Federal Reserve chairman Ben Bernanke's willingness to lower the Fed Funds rate, which has helped to boost economic growth stateside and partially alleviate fears of a recession.
However, the challenges presented by the US economy last year have not been forgotten and continue to temper investment forecasts at the beginning of 2008, with Richard Dunbar of the SWIP UK Market Outlook describing the subprime collapse as a "whirlpool" which is "still circling" and pulling in the unfortunate and unprepared, such as its most high-profile casualty, Northern Rock.
Citing the recent selling of assets by Bradford & Bingley and Alliance & Leicester as evidence that the subprime fallout continues unabated on this side of the Atlantic, Mr Dunbar predicts that the pervading economic conditions of 2007's credit crunch "could be with us for some time" in the UK. In terms of prospects for the US market, he is less confident than the Invesco report and describes the current chances of avoiding recession as "touch and go".
Meanwhile, Gareth Quantrill of the SWIP Global Bonds Market Outlook advocates a slightly more positive view. While admitting that the effects of the subprime collapse will have a role to play in world markets for "the next 12 months at least", he expresses confidence in the US's ability to avoid recession, helped by the Fed's willingness to cut rates. In addition, he claims that the substantial re-pricing of markets has created improved opportunities for entry-level investment in bonds at the start of the year, regardless of wider economic conditions.
Attempting a long-term forecast, Mr Quantrill also weighs up the question of the central banks and the ability of established monetary policy regimes to cope in the face of inflationary pressures from emerging markets - a challenge which could prove to be a crucial barometer of economic performance in developed markets over the next 18 months.
