Oct 9 2007
A tumultuous summer across global markets is drawing to a close, but the full impact of the ructions felt across a wide variety of sectors is still being assessed as the dust begins to settle. The effects of the housing crisis in the US continued to impact on markets throughout September, as lenders tightened credit conditions. And further concerns became apparent, as difficulties seeped into the broader economy and global operations such as mining. Barings World Market Monthly Review reports on a warning from the Organization for Economic Co-Operation and Development stating that the US economy was set to experience a "quite significant" slowdown on the back of the crisis.
At the same time, while in August hopes may have persisted that the effects of sub-prime difficulties might be restricted to the financial sector or largely within US shores, the events of September have proven that more than mere ripples have been felt across the Atlantic. The bank run at Northern Rock resulted in provision of liquidity support from the Bank of England and an unprecedented 100 per cent guarantee of saver security from the UK Treasury, while the European Central Bank acted to address the crisis by injecting billions of dollars into the financial markets.
With the tremors abating, analysts are assessing the wounded and are starting to pose the question: what next for the sub-prime market?
Perhaps surprisingly, the mood remains buoyant in a number of sectors. On October 1st, Threadneedle Leigh Harrison's Weekly Blog proves optimistic, suggesting that the true lows of recent weeks are now past. "Equity investors ... seem to be taking the view that we are past the worst of the knock on consequences of the US sub-prime loans crisis. Indeed, market watchers are now starting to price in another cut in the US and lower rates in the UK and Europe too," he explains. However, he sounds a warning that fixed interest markets and the wider economy remain on shaky ground, emphasising the lack of flexibility in credit markets, the potential slowdown in the UK housing market and ongoing "meltdown" in the US.
But Peter Cockburn, manager of the SWIP UK Advantage Fund, is more downbeat. The feared bleed of instability from financial markets into others caused the SWIP UK Opportunities Fund, of which he took the helm last month, to reduce holdings in resources companies such as mining firms as pressure from the mortgage markets started to hit.
Interestingly, the Invesco Perpetual Monthly Market Roundup Overview for September suggests that the US equity market outperformed all other global regions. Additionally, the Invesco Perpetual USA Market Update states that the "tumultuous" month in financial markets somewhat overshadowed "encouraging" earnings growth in US companies, with average quarter two growth pegged at 7.7 per cent.
Meanwhile, Japan lagged - the adviser's Japan Market Update states that small and mid-cap stocks bore "the brunt" of the ensuing sell-off. European equities entered September lower, with the exception of Germany whose performance was buoyed up by companies such as Metro, Bayer and Volkswagen.
Standard Life Investments UK Equity High Income Fund's Smaller Companies Fund update asserted that its target sector had underperformed during August amid fears of "contagion" from the sub-prime market. However, while the market saw volatility during the month, the fund's manager, Harry Nimmo, continues to see long-term potential in the market. "The underlying trading environment continues to be robust and we will take advantage of any stock level volatility to add to favoured positions," he asserts.
And Karen Robertson, manager of the firm's Equity High Income Fund, states that the UK stock markets should benefit from lighter sentiment as investors see interest rates hitting the peak of their cycle.
Meanwhile, in Barings Monthly Asset Allocation Views, Percival Stanion predicts a slowing of economic growth across the whole gamut of western economies in light of the lower availability of borrowing options for sub-prime borrowers. The head of asset allocation at the firm states that in the US the slowdown will continue to be driven by the weak housing market. Conversely, industrial growth should remain positive, as should business and governmental capital spending, he believes - while warning that inflationary concerns persist. Writing in September, Mr Stanion stated that US consumer spending would be bolstered should strong job market figures become apparent - and last week's statistics may bear out his forecast.
"We are closely monitoring the problems in the US mortgage-backed debt market and the impact on US and international banks. As a result, we are downbeat on the prospects for the financial sector, particularly as earnings expectations are likely to be severely curtailed over the coming months," he stated. "However, though there may be some nasty shocks over the next few months, attractive buying opportunities should emerge."
He concludes that materials, energy, industrials and technologies are more attractive sectors in the coming weeks than consumer-related and financial sectors.
But Karen Robertson of Standard Life Investments UK Equity High Income Fund suggests that the financial sector is not as shaky as many believe: "Investors have priced in an overly pessimistic outlook for some companies in the banking sector, where we expect earnings trends to be more sustainable than the market expects."
Returning to Threadneedle Leigh Harrison's Weekly Blog, warnings are sounded against short-sighted portfolio management in the coming weeks, with an eye to the year ahead essential. "Whilst some funds can take a short-term view for the next quarter, quite a few are already focused on the shape we need to have in 2008," Mr Harrison cautions. "Whilst I wouldn't want to have only the 2008 portfolio today, you need to be mindful of what you want to own for next year and make decisions for the fourth quarter this year in that light."
Also looking to the future, Edmund Brandt writes in the JPMorgan North America week under review that stocks in the US are rising as investors see weak economic data as harbingers of a further rate cut by the Federal Reserve. In the face of the summer's shake-ups, S&P, Nasdaq and the Dow Jones all ended the quarter higher. However, while investors may be looking beyond sub-prime strife, the impact continues to be felt elsewhere: "Consumer confidence was undermined by further bad news from the housing market. The Conference Board's confidence index fell from 105.6 in August to 99.8, the lowest level in almost two years," Mr Brandt states. "New home sales fell 8.3 per cent in August, while existing home sales dropped 4.3 per cent - the sharpest fall in 16 years."
This morning, October 8th, talk of possible takeover offers from four private equity firms has seen shares in Northern Rock jump by more than 13 per cent. As increasing numbers of institutions disclose the consequences of exposure to the sub-prime markets and the chances of a US recession are evaluated, the effects of the summer's difficulties are bound to be subject to heated debate and future speculation in the months to come.
