September 2007

Summer months in the market are often uneventful periods comprising of reduced share dealing volumes and a lack of corporate newsflow. Dealmakers enjoy holidays to recharge their batteries and traders take a break to enjoy the profits they have generated in previous months. However for those at their desks watching their terminals, this was an August that will not be forgotton in a hurry. Investors had to keep their seatbelts firmly secured during a month of wild volatility where triple digit intra day moves became almost the norm. From subprime lending defaults in the US, the entire global financial system became contaminated with fear as a liquidity crunch drove equity markets lower.

As financial institutions pulled in the purse strings, shares fell sharply on the resultant lack of takeover activity (rumour) and concern that an economic slowdown could follow. As alluded to historically in my reports, it was hoped that a withdrawal of vital credit would not occur but it did and infact as I write, it remains a major issue with the short term (3 month) inter bank lending rate being 105 basis points (1.05%) above base rates: the highest this rate has been for 9 years. Banks are currently not trusting each other and the Bank of England is being leant on to act and appease accordingly. The Bank has been criticised by some for not acting or intervening in what could become a major problem for the economy going forward.

I am pleased to report that the blue chip index has rallied circa 9% in the last fortnight; amazingly, it has been up 11 days on the trot. Central banks across the globe have been pumping cash into the financial system and there is a firm view that base rates in the US will be reduced this month (further to an emergency cut in the discount rate last month – the rate at which the Federal Reserve lends to the banking system). To the extent that credit problems can be remedied by central bank action, we have hopefully experienced a correction in a continuing bull market. Some well respected CEOs in the States however have suggested a recession across the pond is a distinct possibility triggered by subprime lending (accepted that the American economy is facing different and more difficult challenges than the UK economy). We are also keeping a watchful eye on residential property values as any weakening in this space would have a powerful and negative impact on general consumer confidence: critical to general economic growth.

September can be a difficult month for shares but if we can get through in the absence of further negative news (reference perhaps banking exposure to sub prime) and if interest rates have peaked (currently the majority view), the final quarter can hopefully be one of improvement in the market indices. Stabilisation needs to return in the first instance and assuming it does, the banking sector is probably offering some solid value for medium term investment.