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09-04-08
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Market Commentary: How long will the US credit and financial crisis last?
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"The credit crisis will last longer than assumed; a quick end is a pipe dream." That is the general tenor of the response to questions about the duration of the current crisis in
the financial markets. It stands to reason that the supply overhang in the US housing market will not disappear overnight; hence, for a certain period of time house prices
cannot be expected to climb. However, a distinction needs to be made between the duration of the crisis in the real economy and the crisis in the financial markets. As a rule,
there is usually a marked time lag between the two: financial markets react before the real economy slips into recession and start to recover before the economy bottoms out. A
quick look at the pattern over the past 60 years, in other words since World War II, shows us that on average stock markets began to anticipate an approaching recession six months
before it actually materialized. In the current financial crisis, the beginning of a possible recession probably coincided with the start of the year. On average, corporate
earnings reached their lowest point 12 months after the recession began, which would be the end of 2008 in the present case. The stock market, on the other hand, usually bottomed
out on average eight months after the beginning of the recession. Applying this figure to the current situation would indicate some point in summer. These figures are, of course,
average values based on a sequence of ten recessions, whereby the margin of fluctuation for the individual phases varies considerably, which is why the above values should not be
taken as scripture. The important point to note is that equity markets always recover before the end of the contraction in the real economy. We are thus retaining our
defensive and well-diversified investment strategy. We remain underweighted in the US dollar. For our bond allocation we recommend only paper with the highest credit ratings for
the time being, with new investments in shorter durations, and for equities defensive stocks in the energy, commodities and consumer goods sectors.
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Dr. Thomas Steinemann
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| Chief Strategist of the Vontobel Group |
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| +41 (0)58 283 78 44 |
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Contact
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