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Core of the crunch

Standing in the dealing room of a firm of London stockbrokers last week, I became aware that people were clustered around TV screens showing pictures of a plume of smoke over central London. As the news came in of a serious fire close to Canary Wharf, so the earlier bullish mood of the market evaporated and shares moved into freefall.

The market recovered its poise later in the day but the speed of the turn-round demonstrated just how nervous investors have become. Volatility levels remain high and bad news is being punished swiftly which can offer opportunities but is hardly conducive to worry-free investing.

Yet shares are not too far off all-time highs in many markets and economic statistics are not pointing to any form of meltdown, even if growth is slowing and inflation has returned as a concern. Perhaps that is why you will still see buyers emerging on bad days.

I detect little concern among professional managers I have contacted in recent weeks. Six of them were at the Cofunds quarterly investment conference in London last week. The topic was global equities and, from half a dozen managers, we had an equal number of different approaches to the task of diversifying internationally. There was even a US specialist from Martin Currie who succeeded in making me wonder why I had been so concerned about what the future might have in store for investors.

This conference confirmed that the retail investment industry has become very grown-up with a sufficient variety of styles and approaches to accommodate every investor. Whether you are seeking income from global businesses, looking to profit from the success of entrepreneurs or to diversify widely through a portfolio of non-correlated assets, the opportunity exists and was on display at the Cofunds platform conference.

Earlier that day, I had the opportunity to comment on developments at Northern Rock (twice) and to learn from Barclays Wealth what it made of markets. Barclays was also one of the major UK banks declaring mea culpa over the credit crisis last week. Its shares were treated somewhat less favourably than HSBC on disclosure but it had been at the centre of speculation over how much pain its hitherto stellar investment banking operation might be feeling.

All this serves to remind investors that at the core of this latest crisis is lending and securitisation of these loans. Little wonder that banks have been bearing the brunt of investors’ concern over what it all might mean in the long run. Barclays Capital has been at the forefront of the creation of sophisticated financial products and, on the face of it, the writedowns it has taken has barely interrupted its growth. Yet investors remain nervous.

One of the best summaries came in an email from a leading investment bank which likened the credit crunch to the near disaster that overtook the Lloyd’s insurance market a decade or more ago. It was claims as a consequence of asbestos that brought this venerable institution to its knees but, according to this commentator, the knowledge that this timebomb was ticking and bound to explode was known to some insiders for many years.

The result was a series of reinsurance deals aimed at offloading the problem from those who recognised the risks to those who didn’t. Fast-forward to the current situation and what you have is a lending frenzy, with borrowers not always of the highest quality and loans packaged and sold on to those who may not understand the potential risks. The analogy is clear. Lloyd’s took many years to resolve its problems. Credit market operators may find themselves in a similar position.

Brian Tora (brian.tora@centaur.co.uk) is principal of The Tora Partnership

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