FYI | Apr 14 2008
By Chris Shaw
Following the US market’s fall on Friday night on the back of some disappointing earnings results it is clear investors remain somewhat fearful and nervous of equities, particularly as policy makers are struggling to identify exactly what are the problems in the US economy in particular that need fixing to bring back some level of stability to global markets.
Commonwealth Bank chief economist Michael Blythe notes a recent survey by ratings agency Fitch attempted to identify what factors were needed to bring about greater stability in financial markets, with market participants providing the responses.
Their responses suggest the necessary requirements are full disclosure by companies on any sub-prime and related losses they have experienced, timely policy action by the US Federal Reserve and some stability returning to US housing prices. This will require some market-driven remedies to emerge, while participants also want to see some signs of potential upside surprises in the state of the US economy as well as a return of investor interest to equities.
Taking these responses and applying them to what has actually been happening in markets Blythe suggests some slow progress is being made, as announced financial sector losses are now at about half the level the International Monetary Fund expects will be the total, while the Fed has certainly acted quickly in terms of trying to stimulate the US economy.The Fed’s moves in cutting rates and offering other forms of stimulus will eventually flow through from the financial sector to the broader US economy, offering some upside risk for US growth in the future.
As well the US housing market is making progress as affordability has fallen back to levels last seen in 2004 and as Blythe points out, improved affordability means the market will better be able to clear its inventory of unsold properties and this in turn will help bring about greater stability in prices.
Blythe also notes global savings continue to exceed global investment in physical assets and at some point the excess will be invested in financial assets, meaning demand for such assets is likely to trend higher in the future given these assets are currently available at what in ordinary times would be considered attractive prices.
In other words, while timing the markets remains very difficult in the current investment climate Blythe suggests it will be when investors find the courage to invest in financial assets, a move that will require them to take on some risk, is when there will be a turnaround.
