The pain before the gain?

After posting heavy third quarter losses last week due mainly to bad debts on real estate, Lehman Brothers, the fourth largest US investment bank, has filed for bankruptcy protection earlier this week. The bank had lost 94% of its market value this year. Following on from Bank of America’s rescue of Merrill Lynch and AIG’s USD40 billion capital restructure, are the financial markets beginning a cathartic purge that was postponed last March when US regulators decided to shield investors from the worst effects of the Bear Stearns failure?

Many financial commentators now believe we are entering a significant re-ordering of global financial power structures. Many, including former Federal Reserve Chairman Alan Greenspan, believe more banks and financial companies may yet succumb to the credit crunch in what is probably a once in a century event.

The banking industry is making cash available in this crisis: ten major banks (Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs. JPMorgan, Merrill, Morgan Stanley and UBS) have created what is in effect a USD70 billion emergency fund which can make short-term loans to financial institutions in potential trouble.

US regulators appear to now believe the short-term pain from a purge is necessary for the market’s long-term health.

Some market commentators are suggesting that the Bric (Brazil, Russia, India and China) and other emerging economies are fast becoming defensive plays as the credit crisis unfolds further. The relatively unsophisticated financial institutions in the Bric countries have largely escaped the effects of the credit crisis afflicting western economies.

The events of the last week have lead to equity markets falling sharply and the dollar has lost the most against the yen in a decade. The yen is now at a two month high against the dollar at 103.93 yen to the dollar.

Crude oil has fallen to a seven month low as the Lehman Brothers filed for bankruptcy and the oil infrastructure of the Gulf of Mexico escaped the worst of hurricane Ike. Crude for October delivery now stands at USD92.11 a barrel on the New York Exchange.

Gold has increased in price in response to the recent developments in the credit crunch saga as investors seek a haven from weaker stocks. The price of gold futures for December rose to USD776.50 per ounce but has fallen back after investors have begun selling gold to raise cash.

Short-term variations in the stock markets in response to the latest data releases may provide investors, who wish to make regular contributions, the opportunity of dollar cost averaging.

Whichever way the financial markets respond to the effects of the credit crunch or to find out more about dollar cost averaging, make sure you speak to your Account Executive to find out how you can access Hansard’s extensive range of fund links when creating and reviewing client portfolios.

Adrian Corkill
Reply to: adrian.corkill@hansard.com

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