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11-08-08
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Market commentary: 12 months of the subprime crisis - what is our position now and where are we headed?
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The beginning of August 2008 marks the first anniversary of the subprime crisis. And, 12 months following its outbreak, global sentiment could hardly be worse:
during this time, the global equity markets have declined by around 15%. Financial stocks suffered a loss of 30%, while energy stocks only managed to climb a few percent due
to soaring oil prices. According to most analysts and commentators, economic prospects are currently grim. There are indeed a few hurdles on the path to economic
recovery. For instance, unemployment in the USA is currently on the up; the banks have drastically tightened their loan criteria; despite interest rate cuts, US mortgage
rates have still not fallen; real estate prices are still not completely stable; and the banks are still not borrowing enough on the money market. All these factors indicate
that further writedowns are to come, especially as long as real estate prices continue to languish.
Despite these challenges for the second half, there is also some good news. US monetary policy is exceedingly pragmatic, and the Fed will not hesitate to cut interest rates
further, should renewed crises occur. The fiscal authorities have taken rapid and effective action, and have given consumers a boost through tax rebates. State aid for
the large, government-backed mortgage institutions Fannie Mae and Freddie Mac was welcomed by the market. Any regulatory discussion in this case is unnecessary, as these
companies already had a de facto state guarantee that is now simply being put to use. This governmental safety net was the reason why the importance of "Fannie" and
"Freddie" grew so disproportionately in the first place. On the more positive side, the US economy has so far developed better than had been feared. We expect the
economic trend to take a gradual U turn, which means several quarters with modest growth rates. We believe a recession can be avoided. After all, falling oil prices will
have a positive effect on inflation, taking pressure off the central banks.
In conclusion, the stock markets have already factored a lot of bad news into current prices. Evidence for this is the fact that the markets have mainly been moving sideways
with high volatility since the end of February, whereas earnings forecasts were constantly revised downwards. However, this change in trend is still unfolding. In the
case of the S&P 500, current prices factor in an earnings dip of around 7%, whereas analysts are currently predicting a rise of around 8%. A trend reversal on the
stock markets will occur before earnings and the economy have reached their lowest point. As in previous crises, this will be a point where only very few people are expecting
a turnaround, and where news is still negative.
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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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