Thursday, December 4, 2008
Insight: A rocky road to 2010
By Aline van Duyn Published: December 3 2008 16:42 Last updated: December 3 2008 16:42 A look at banks’ marketing slogans – no doubt chosen with great care and sincerity not so long ago – is extremely uncomfortable. “Where vision gets built,” was how now-bankrupt Lehman Brothers defined itself. “When your money is safe everything is too,” Dexia proclaimed, before receiving a $9bn capital infusion from various European governments in September. “Live richly,” said Citibank, in the not-so-distant days when it wanted people to borrow money even if they did not need it. Such exhortations now have an extremely hollow ring to them. The much-needed return of confidence to financial markets the collapse of many parts of the banking system remains elusive. The hits to the real economy – in the US, Europe and even China – are severe and continue to get worse. There are no signs that lending will do anything other than shrink in the coming months, putting a further squeeze on both companies and consumers. The sheer scale of what has happened to financial markets is taking a psychological toll and affecting how investors approach the markets. Here’s just one small example of the frenzy: Mary Miller, head of fixed income at T Rowe Price, a fund management group with more than $340bn of assets, told me that organisers of the company’s annual conference looking to the year ahead wanted her slides two weeks in advance. That has never been a problem before, but this year she felt her comments would not stand up for that long. In the end, she submitted them one day in advance. Ms Miller, who has been covering financial markets for decades and stresses that she has seen plenty of downturns, talks of the “fatigue and disbelief” experienced by investors such as herself. This is shared by many bankers and policymakers I speak to. One of the biggest strains has come from trying to absorb the “never ending patchwork of solutions” devised by governments. Anyone tracking the many market intervention plans by the Fed and the Treasury knows the list is dizzyingly long, and that details are still in many cases sketchy. The many moves to inject liquidity into financial markets are clearly going to last longer than had been thought a few weeks ago. Just this week, the Fed added another three months of life to three liquidity facilities. These will now run until at least the end of next April. Jeffrey Rosenberg, head of credit strategy at Bank of America, says this is an acknowledgement that the “period of adjustment” in financial markets will take longer than initially anticipated. Understanding how government’s new role has changed markets and investment opportunities is key. Bill Gross of Pimco highlighted that change this week. “We are now morphing towards a world where the government fist is being substituted for the invisible hand, where regulation trumps Wild West capitalism and where corporate profits are no longer a function of leverage, cheap financing and the rather mindless ability to make a deal with other people’s money,” he wrote in his monthly investment outlook. His advice to stock investors is to embrace the “sheepish” rather than “brave” new world and get used to lower earnings, growth and reduced “animal spirits”. In such a cautious environment, risk-taking remains largely absent and often unwise. Indeed, Ms Miller says the focus for investors is to just get through to the end of the year, and then hope for some stability in 2009. One bank slogan has proved to be prescient. “Here today, where tomorrow?” was how Fortis, the embattled Belgian-French insurance giant and financial services firm, marketed itself, complete with question mark. This could well be a slogan for current sentiment throughout the financial markets. A few months ago, 2009 was predicted to be a turnround year; now many investors are hoping for more stability at best, as the question of “where tomorrow?” remains so hard to answer. Real improvements and growth? Maybe in 2010, but that is the view of the optimists.