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SVM says bull market may not be over

SVM claims that the recent market volatility may not signal the end of the bull market, saying that the crisis so far is a question of liquidity not solvency.

SVM fund manager Neil Veitch says financial crises are quite common in the latter stages of a bull market, but he is confident despite the recent volatility, the global economy remains in “robust health”.

He says unlike in 1998 with the crash of Long Term Capital Management, negative exposure is not limited to a single entity but spread throughout the financial system among the banks.

Veitch says global economic growth is being bolstered by China and India and recovery in Europe, while corporate profitability and balance sheets remain strong.

He adds: “Bull markets are borne out of substantial central bank reflation as interest rates are aggressively cut to stimulate activity. As the bull market develops it gains the strength to stand on its own two feet and is driven along by improving corporate profitability. Alongside a recovery in the market, central banks continually tighten monetary policy to ensure inflation expectations remain under control.”

Veitch concedes however that when capital is freely available it becomes abused. He says as a consequence, almost every monetary tightening ends in financial crisis as rates are raised to an inflection point where the weakest link in the global economy begins to buckle.

But Veitch concludes that while there is no denying the liquidity events are frightening, they do not indicate that the current cycle is ending.

He adds: “For that to happen, we would be looking out for sharply accelerating inflation and/or aggressive tightening of interest rates by central banks. While SVM recognises the spreading impact of the sub-prime crisis is a negative development, it believes that central banks have the tools in their armoury to control the fall-out.”

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