A correction, and an opportunity
The credit markets fallout has been correctly described (by the US Treasury Secretary) as a necessary re-pricing of risk in the context of changed interest rate conditions, primarily in the property market. Kneejerk response suggests (for a really good example see CNBC commentator Jim Cramer on YouTube), as usual, that the monetary authorities should respond. However, that would be wrong. Interest rates must be geared to protecting the basic integrity of money - i.e. inflation control; and, further, credit conditions should also. Thus, the large injections of liquidity into the markets by Central Banks around the world must be regarded with some concern - as the danger of ‘moral hazard’ arises; and that could ultimately be more dangerous than any fallout in stock and credit markets arising from the repricing of risk. Fundamentals, in both the world and Irish economy remain sound - although, in Ireland’s case, the continued loss of competitiveness must be arrested, primarily, through a halt to the rate of increase in public spending, which far exceeds the level in any other OECD country.
Market conditions this summer has led to a boom-time amongst firms offering spread-betting and contracts for difference (CFD) products. The re-pricing of risk in the credit markets is also resulting in changed strategies there. After a buoyant first half of the year, issuance has come to a halt, as fears over the continuing fall-out from the sub-prime market in the US impact on the European debt markets. However, as we report on page 1, while the summer of 2007 has been a bit of a write-off for the debt markets, a number of Irish securitisation industry players see the crisis as being more of a ‘correction’. And, as always, for ‘correction’, read ‘opportunity’. Their expectations are that things will pick up in Q4, and by 2008, the backlog of deals which have been put off because of the downturn, will hit the market, leading to a buoyant year ahead. This expected return in supply will be a central theme of the forthcoming 6th Annual Finance Dublin International Securitisation conference, to be held on November 26th and 27th, and it will assess the new market conditions for both issuers and investors.
Property
In Ireland, the health of the residential property market mirrors the concerns in the US. This is a response to the interest rate cycle, which has trended upwards since December 2005, when the ECB first signalled the end of the period of very cheap credit. The return of buoyant conditions in the Irish residential market will await two things (a) an actual re-pricing of property in market transactions that sees Irish property values return to some semblance of parity with international markets - this could mean a cut in values of 25 per cent to 30 per cent compared with the unsustainable levels of Q1, and Q2 2006 (a process that some auctioneers now report as well underway, if not already largely achieved), and (b) a feeling that , if interest rates are not on the way down again, that the peak has been reached, or is close to being reached.
In last month’s issue of Finance we reported the forecasts of a panel of leading Irish economists on ECB interest rates. Two actually forecast no further rises - and the most bearish predicted four quarter point increases. While it might be heroic for the two bulls to hold to their forecast, the stock market wobbles and the credit market conditions since their (early June) forecasts will have impacted on the aggressiveness of central banks in raising rates, and this must be bullish for the interest rate bulls. However, our comments in the first paragraph above remain, and, thankfully, we can expect central banks to continue to keep their eye on the inflation numbers. Thus, for players keen to spot a good timing opportinity for market recovery, correction, and opportunity, the motto will be keep a close eye on the US and Euro-zone inflation numbers. |
