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The going gets tough

One of the pleasures of this business is the buzz you can get from the atmosphere on a trading floor. The newsrooms of daily journals and broadcasters can deliver a similar adrenaline rush to the news junkie. I have been fortunate to spend time in both during my career.

Even when conditions are tough, a trading floor will make you feel that you are at the epicentre of events. It feels like that today in the dealing rooms I visit. Markets are reacting to the newsflow with nervousness and great volatility. There are bulls about but this has been one of the worst-ever starts to a year.

My views on investment have revolved around the bigger picture for some time. Any thinking investor needs to be focused on developments in economies and credit markets and they will not be taking much comfort from these at present.

Look at the behaviour of the Fed. Knocking 125 basis points off interest rates in a week smacks of panic. It has had the presumably desired result of easing the interbank market but fears of a rush to rebuild assets through raising new capital is doing nothing to restore investor confidence in bank shares. In turn, the poor performance of high-yielding stocks will not be helping income fund managers. We still do not know if a US recession is avoidable.

The plight of monoline insurers is adding to concerns over the time it will take for the credit crunch to pass through the system. Any downgrading of their status by risk assessment agencies will have a clear knock-on effect on the bonds they effectively underwrite, which could result in forced sales by institutions bound to hold only the highest-quality paper.

Arguably, the complex instruments that have been developed to allow trading in loans to take place are as much responsible for the current debacle as the availability of cheap money. Wherever the blame lies, the fact remains that it is a lot tougher for borrowers and lenders alike, despite the cut in rates.

Among the pearls of wisdom I have tucked away for use at tricky times is the fact that markets always over-react – in both directions. The extent of the over-reaction on the downside is, sadly, concealed from us but, with major UK high-street banks standing on single-figure earnings’ multiples, yields close to double digits and at levels little more than half last year’s peak, you have to ask if it has happened here. Unless they cut dividends and issue shares to bolster their capital base, that is.

This is what makes this business absorbing. Talking to two seasoned investment gurus, one said he would not touch bank shares with a bargepole, the other that bottom-fishing was the name of the game.

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

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