Portfolios take a ‘sub-primal’ beating

HOW quickly investment sentiment can sour. Up till a few weeks ago, punters were still betting on penny stocks like there was no tomorrow. But the turning point came last month when a US bank, Bear Stearns, spooked the markets with news of major losses and accounting difficulties with its investments linked to risky US housing loans.

Losses by other banks and investment funds have led to what has been termed the ‘US sub-prime housing crisis’ – the source of turbulence and uncertainty in global financial markets in the last couple of weeks.

How these financial losses will trickle down to the real economy – the consumers and companies – remains to be seen.

Meanwhile, banks are now setting aside cash as a precaution against further losses from their bad investments and have become far more cautious about lending.

This is known as a ‘credit squeeze’, but the fear is that this could become a veritable ‘credit crunch’ in which companies and consumers have inadequate access to loans, according to an AFP report.

‘As private sector banks, in a time of uncertainty, set aside more funds for their own funding needs, we are seeing a shortage of liquidity in the money markets,’ AFP quoted Societe Generale’s chief Asia economist Glenn Maguire as saying.

A shortage of liquidity would restrict the ability of companies, and eventually consumers, to borrow, potentially slowing economic growth worldwide.

In an attempt to avert a crisis of confidence in global credit markets, central banks in the US, Europe, Japan, Australia and Canada last week added about US$136 billion to the banking system.

The Federal Reserve, in a second day of action in concert with the European Central Bank (ECB), provided US$38 billion of reserves and pledged more ‘as necessary’, in a statement unprecedented since after the Sept 11, 2001 attacks.

Money market rates had risen worldwide in the previous two days on evidence that the sub-prime crisis is spreading.

By the end of Friday, the central bank actions helped spark a turnaround in American stocks and drive the US overnight bank lending rate below the Fed’s target.

The Dow Jones Industrial Average recovered from a 210-point deficit to end just 31 points lower.

‘They accomplished their short-term mission to make sure the market stabilised ahead of the weekend,’ Bloomberg quoted David Resler, chief economist in New York at Nomura Securities International Inc, as saying. ‘It remains to be seen how much more they’ll have to do.’

Our portfolios declined by an average of 7.5 per cent last week. The one which fell the least – the analysts’ upgrades portfolio – is also the one with the highest cash component. This illustrates the truth of the saying ‘cash is king’ in a turbulent market.

It slid only 2.2 per cent. It had about 30 per cent cash as at last week due to the privatisation of companies like MMI and Amtek, and Want Want Holdings soon.

Meanwhile, small-cap stocks with dubious fundamentals which have been carried along in the wave of euphoria until a few weeks ago have seen the biggest declines.

The one-month top winners portfolio and the one-year top losers portfolio shed the most last week. Each fell by 9.4 per cent.

Big losers included General Magnetics, JK Technology and China Education. The lowest forward PE portfolio and the lowest price-to-book portfolio were down by 8.5 per cent and 7.9 per cent respectively.


Source: Business Times 13 Aug 07

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