Northern Rock’s model is dependant upon them raising money in financial markets, a move which is being squeezed in these conditions, while others spend their time reinvesting customer deposits.
He says: “We cannot say what will happen next to Northern Rock, but the broader issue here is one of confidence in the banking system. The Bank of England has made it clear that it has no intention of bailing out reckless investors, but it will step in to provide funding to limit any damage to the real economy, including protecting bank customers.”
Bonham Carter says it will take time for this dislocation in markets to subside, with a hike in UK mortgage rates a likely consequence.
“One cannot predict the exact timing of a full resolution of the problem. However, we believe that we are facing an investment outlook that comprises lower economic growth and falling interest rates (especially in the US) which will make equities an attractive asset class. However the probability of individual shortfalls in corporate earnings will rise and therefore fund managers need to make greater distinctions between individual companies and sectors.”