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No-one has the foggiest

The recent global market volatility has sparked a barrage of opinions, predictions and speculation from City professionals all more than willing to offer their views ranging from “don’t panic” to dire warnings of a crash.

Nevertheless, it is keeping the investment sector, and all those who have client cash invested in it, on their toes.

Blue Planet Investment Management came out last week warning investors that financial markets are entering the worst banking crisis in decades and the stockmarket is set to fall by another 20 per cent.

Worldwide financials investment trust manager Ken Murray claimed liquidity issues are causing continuing problems in the money markets and banks are increasingly unwilling to lend to other banks they perceive to be risky.

He says: “We are entering one of the greatest banking crises in decades. The credit cycle has turned, bad debts are soaring, banks will go bust and stock markets will fall much further. People need to be told the truth as opposed to being spoon fed palliative words.”

He added that loans drawn down with cash going out and being replaced by highly illiquid, poor quality assets will “suck the liquidity” out of investment banks and fill their balance sheets with bad debts.

“I would not be surprised to see one or more of them become insolvent in the near future,” he predicted.

Williams de Broë economist Jim Wood Smith says the Fed’s statement on credit conditions reads like the diagnosis of a “terminal disease”.

He says: “We can take this one of two ways, either a major bank is in big trouble or else this is the Bernanke put option in its full glory. The market has gone for the latter i.e. don’t worry about all our stupid lending ‘cos Uncle Ben will bail us out.

“There is no escaping from the reality that this ‘correction’ is rapidly becoming a crash. But it is nothing like 1987 when the Dow collapsed 23 per cent in one session, this more like the death of a thousand cuts.

“The usual nicety here is to say that ‘we expect the period of volatility to continue’. What this actually means is that no-one has the foggiest.”

Occupying more of the middle ground, Henderson Global Investors threw its two cents in by predicting equity markets will remain volatile in the short-term but could end the year higher.

The firm warned if a credit crunch develops however, 2008 might see a much weaker output and profit growth than expected.

Director of economics and strategy Tony Dolphin said the Federal Reserve’s rate cut last week was clearly meant to calm markets.

He says: “The actions by the Fed on Friday were a first step in addressing these issues and the markets reacted positively. However, given the potential scale of the problems, further interventions by the Fed may be necessary.”

On a far more positive note however, BlackRock assured investors there is no need to panic as the storm will eventually blow over.

Vice chairman and global chief investment officer of equities Bob Doll says it is extremely difficult to predict what might happen in the markets next, but the battle lines are currently drawn between the bears and the bulls.

He says: “The bears argue that the global equity market in general, and the U.S. market in particular, topped out in early July, that the U.S. economy is in the midst of severe problems and that the dark clouds are thickening, not passing.

“The bulls, to maintain the meteorological metaphor, would argue that while the summer storms are intense, they should give way to partly cloudy if not sunny skies.”

Doll says he is much more inclined toward the latter camp as the world economy remains constructive, corporate earnings growth remains solid, stocks are reasonably priced and the Fed is beginning to take some action.

So the long and the short of it is, well, as Jim Wood Smith put it, no one has the foggiest.

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