Investment Commentary: The summer horror days

Brian Tora is one of the City's most respected financial commentators. Previously he held the post of Investment Communications Director at Gerrard Investment Management Limited. He writes a regular monthly column on investment issues for Moneyextra.

Perceived wisdom has it that August is a quiet month. Fund managers and their clients are on bucket and spade duty. Companies are between reporting seasons. Even the politicians are out of limelight. Not this year, though. Whether it is the advent of the Blackberry, a propensity for news media to pick up on financial stories - or simply the fact that this latest crisis really is important, markets have been dancing to a wild tune this summer.

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By now anyone who has not heard the term "Sub Prime" must have been away on a different planet. But is the collapse in the value of the sub prime mortgage market in the US the real cause of this summer's turmoil in financial markets or merely the trigger? After all, if all these loans to the less well off in the world's richest country turned out to be worthless - a virtually impossible scenario - then the impact surely would not be such that central banks all around the world have to pump money into the system.

And this is precisely what has been happening. In Europe, Asia and the Americas central banks have been priming the pump with an energy that suggests they have serious concerns over the potential outcome of this recent crisis. The issue seems to one of confidence. Sentiment has turned against borrowers. And the problem is that too many people are borrowing too much money in too many places at present.

If the credit crunch that is spooking financial markets at present really does turn into a significant issue, the consequences are not very comforting. Business needs credit to prosper. If borrowing becomes more difficult or more expensive, then there will be an impact on economic activity. And if America's hard pressed consumers rein in their spending plans because they need to reduce their indebtedness, then that too will slow economic growth.

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Little wonder, then, that the world's central bankers have been pouring money into financial markets. Little wonder, too, that expectations over the likely direction of interest rates have executed a swift 180 degree turn. But that does not solve the issue of indebtedness. This particular set of problems looks as though they might be with us for a little while yet.

When a similar crisis erupted in Asia a little under a decade ago, it did upset market sentiment for a brief period, but was resolved more swiftly than many expected. Part of the resolution was an easing of monetary policy by the Fed. The so-called 'Greenspan put' helped restore confidence, but arguably it helped lay the foundations for the crisis through which we are travelling at present. The extent to which central banks should bail out imprudent borrowers is highly debatable.

But separating those who deserve to be punished and those caught as a consequence of collateral damage will not be easy. If, as seems likely, central bankers react to this crisis by easing monetary policy, we may simply be deferring the day of reckoning. On the plus side, a slide into recessionary conditions may be averted, but it is hard to see this scenario continuing without some consequential slowing in global growth.

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For investors it is hard to draw firm conclusions, given that the final outcome for borrowers and lenders alike may still be some way off. For many professional investors the shake-out has been viewed as more of an opportunity than a threat. This month could, though, see some re-positioning amongst portfolio managers as they return from holiday and re-assess their positions. Expect the present level of volatility to remain for the time being as a consequence.

Read last month'sInvestment Commentary: (I won't say) I told you so...

04 September 2007 © Moneyextra.com

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