Aug 29 2008
Credit crunch made its way into the Concise Oxford Dictionary in July, highlighting the fact that things aren't getting any better, particularly as banks in England and Japan gave further warnings of recessions.
In Japan, the central bank said a technical recession was on its way after gross domestic product fell consecutively over two quarters, reported Barings World Market Monthly Review.
The Bank of England said inflation had been higher and activity lower than expected, with its Monetary Policy Committee still in deadlock over whether to raise interest rates.
JPMorgan Weekly Strategy Report reported a two per cent drop in eurozone GDP quarter-on-quarter in the second quarter, adding that the European Central Bank (ECB) was operating the "tightest monetary policy in history".
Few analysts expected the ECB to budge as all European stock market indices pointed lower, said a JPMorgan Asset Management Report.
The big question mark hung over the US, as the credit crunch appears to have hit its nadir.
Although the Fed has not raised rates, it has made a high profile bail-out of the Federal National Mortgage Association, nicknamed Fannie Mae and the Federal Home Mortgage Corporation, otherwise known as Freddy Mac.
Shares lost a quarter of their value in the middle of August and they sought shelter in the protection of the Federal Bank. The Fed also helped US investment bank Bear Stearns in March. Both moves have eased the stranglehold on company growth over fears of financial risk.
Businesses are almost daring to look up in the US after the stimulus package earlier this year, said the Barings World Market Monthly Review. Growth might be stymied, however, in companies that were too pessimistic and ran down inventories.
The US dollar improved by 7.6 per cent against the Euro in mid-July, but JPMorgan Weekly Strategy Report says it remains to be seen whether this will mop up the surplus nations in Asia and the Middle East.
Indeed, emerging markets have been warned to exercise tighter controls on monetary policy by the International Monetary Fund (IMF), according to Barings World Market Monthly Review.
In mid-July the IMF warned inflation was getting out of control, with Standard Life Investments Global Overview reporting a nine per cent jump in inflation in China, a 15 per cent rise in Russia and 25 per cent increase in Vietnam due to over-rapid growth, easy monetary policy, low exchange rates, and the removal of subsidies to deal with energy price rises.
Barings World Market Monthly Review reported countries were using foreign reserves to fight inflation, naming Indonesia and South Korea as perpetrators.
The end of the Beijing Olympic Games may herald a lull in China's previously booming economic performance. Barings World Market Monthly Review said trade surplus was 20 per cent lower in July than the same month the previous year, exports fell over June and there appeared to be less 'hot money' as fewer speculated in the market.
With little reason to build new infrastructure after the Olympics and the loss of the tourist dollar, Chinese fortunes may slow down over the coming months.
Despite rising commodities prices, Standard Life Investments Global Overview tips one Chinese steel maker, which has managed to raise prices in line with the cost of input as a point of investment.
Merger and acquisition activity has been rife in the market conditions of the past four weeks, noticeably with Chinese steel maker bids for Australian iron ore companies, which may go some way to tipping the balance the other way for poor performing mining, oil and gas sectors, according to Barings World Market Monthly Review .
White knights appear to have taken a back seat as unsolicited bids rose to a nine year high. At the end of July they accounted for 19 per cent of takeovers since the start of 2008, according to research firm Dealogic, Barings reported.
Examples included German brewery InBevs' bid for the US's Anheuser-Busch and Germany's ball bearing firm Schaeffler's attempt on tyre-maker Continental.
One to watch, according to Barings World Market Monthly Review, is Spanish bank Santander, which recently took over UK bank Alliance and Leicester, raising share prices.
Santander looks likely to combine the Alliance and Leicester with Abbey, which it acquired in 2004, Barings added.
Standard Life also notices Santander for its good performance and shares Barings' recommendation of Credit Suisse and BBV, Santander's largest Spanish rival, for its good second-quarter results, due to its appearance in the emerging markets of Brazil and Mexico.
However, it was a mixed bag for banks in general with several new rights issues.
Merrill Lynch's share price dropped on a new issue designed to raise $8.5 billion in new capital to offset $18.7 billion in losses.
The share price of Lloyds TSB in the UK dropped on a decision to withdraw dividends on the realisation that the bank wasn't going to weather the storm as well as expected.
However, the Royal Bank of Scotland was highlighted by Standard Life for making a good recovery after its share price decreased earlier in the year on a rights issue to secure capital after heavy profit losses.
Although some investors are taking a lackadaisical approach to inflation, it is worth remaining cautious as analysts have revised global earnings forecasts, with one group of insiders revising earnings down by half to seven per cent from 14 per cent.
Threadneedle Investment Strategy recommends investment in strong companies with good balance sheets as it goes overweight on equities.
JPMorgan went neutral from underweight in small cap stocks in the US, perhaps showing faith in the US market, and remained overweight in heavy caps. JPMorgan and Threadneedle are looking to Asia to invest over other countries.
The volatility in the markets does not appear to be slowing in Europe and Japan, with a slowdown in the UK exacerbated by the energy shock and credit crunch. Expect more merger and acquisition activity too - and not by the white knights.
