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‘Stormy 2008’ expected for financial services

LONDON – THE financial services industry should expect ‘turbulent conditions for 2008 and beyond’ and may report an additional US$300 billion (S$429.8 billion) in losses related to the United States sub-prime crisis, according to a study by consulting firm Oliver Wyman.

‘We expect a stormy 2008,’ Oliver Wyman said in its State Of The Financial Services Industry report. ‘While governments, central banks and regulators scramble to address the aftermath of the sub-prime fallout, several other crises are mounting.’

A slowdown in European real estate, especially in Britain and Spain, potential weakening of the US dollar and a possible collapse in commodity prices may hurt the global economy, according to the report.

A drop in Chinese and Indian stocks may be a fourth ‘potential disruption’ this year, Oliver Wyman said.

Senior executives and investors are gathering at the World Economic Forum in Davos, Switzerland, amid concerns the world’s biggest economy is sliding into a recession.

The mood contrasted with the buoyancy of last year’s meeting, where guests celebrated a bumper year of corporate profits and bonuses and the strongest global economy in three decades.

The US Federal Reserve this week lowered the target rate for overnight bank loans in the first emergency cut since 2001, as it tried to prevent a recession.

US President George W. Bush and House lawmakers announced an agreement on an economic stimulus package that would distribute rebate cheques to 117 million families.

Economists at Goldman Sachs Group and Merrill Lynch are predicting the US economy will fall into its first recession in seven years this year.

Chief executive officers (CEOs) of financial services companies surveyed by Oliver Wyman said they expected share prices of financial services companies to increase between 5 per cent and 14 per cent this year.

The same prediction was made last year, according to Mr Alex Paidas, a spokesman for Oliver Wyman.

Instead, the industry contracted by 7 per cent. This year, 48 per cent of the CEOs surveyed cited deteriorating market conditions as a key threat.

Sixty-nine per cent of the CEOs polled in November and last month said they expected their companies to outperform the industry this year.

‘North American financial services firms will have a tough year,’ Oliver Wyman said. ‘Market uncertainty, combined with further write-downs and expected home price and loan volume declines, implies more squeezes on earnings. Banks most likely will have to increase loan-loss reserves.’

Growth in Western Europe is likely to suffer, while Latin America has a positive outlook and ‘growth opportunities exist’ in Singapore, Taiwan, Indonesia and Korea, according to the report.

Private equity is an industry that is likely to grow, the consulting firm said.

 

Source: BLOOMBERG NEWS (The Straits Times 26 Jan 08)

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