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Guest wrongmove

No Need To Panic

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Guest wrongmove

No need to panic

"Despite my naturally optimistic disposition, I’ve been uneasy about the stock market all summer. Since late May, when many commentators thought the crazy casino that passes for a stock exchange in Shanghai was about to go pop and trigger price falls around the world, I’ve had the feeling that a substantial downward correction was coming. By the time we reached late July – when traditional City chaps think only of golf, cricket and Glorious Goodwood – I thought we were probably secure until the season of autumn turbulence in October. But I was wrong: since last Thursday, one of the most turbulent trading days the markets have ever experienced, shares in London and New York have lost all their gains for 2007, suffering their worst falls since early 2003.

By Tuesday afternoon part of the loss had been recovered, but a doomsters’ chorus of commentary was still telling us why the fall had to happen. In short, we’ve all borrowed too much money and spent it on the wrong things. Put more bluntly, it’s a ‘credit crunch’. US mortgage borrowers – especially the ‘sub-prime’ ones who were bad lending risks in the first place – are up to their eyeballs in a falling property market. Consumers have racked up record credit-card bills and are feeling the pain of rising interest rates, which mean the retail economy is feeling the pinch too. Private equity investors have borrowed billions upon billions to finance buyout deals, stoking share prices to unhealthy levels on the strength of bid rumours and leaving banks with dangerously bloated portfolios of high-risk debt. One way or another it all boils down to greed: for bigger houses than we can afford, for more consumer goods than we need, for fatter profits for private equity investors and richer bonuses for bankers than any of them could possibly deserve. Now we’re all going to burn in hell for our sins.

Or possibly not. As ever, it’s worth taking a step back to assess the realities of the situation. In your deckchair on the boundary of the village cricket ground, in your traffic jam en route to the Channel Tunnel, I suggest you look around and make your own judgement as to whether we’re teetering on the edge of a fiery financial abyss.

Clearly there’s going to be pain and turmoil in the US mortgage market – but is there a directly parallel problem over here? Not as far as I can see from here. British house prices have been levelling off in most places in response to higher interest rates and mortgage lenders have become a little more cautious – but they are not turning borrowers away or flashing panic warnings, and there’s no sign of an incipient crash.

Aha, say the doomsters, but a US mortgage crisis will have knock-on effects elsewhere in the US domestic economy which will ripple across the world, so we’re still all going to hell. But funnily enough, even with a setback in America, global economic growth remains remarkably strong. The US is the biggest locomotive of that growth, but it’s not the only one: the recovery of Germany and the formidable low-cost manufacturing strengths of China and India will all help to keep global trade moving in a positive direction.

As for the private equity and leveraged buy-out scene, it’s true there are huge volumes of debt involved – in the US, $200 billion of it apparently committed but not yet syndicated among the banking community and paid out to borrowers; in Europe, another $70 billion or so. Some buyout deals currently in the offing won’t happen if lenders get cold feet – but there’s no harm in a ‘flight to quality’ which means that only the deals based on the most conservative assumptions and business plans actually get done for a while. Private equity executives, in their recent defence of their methods in front of the Treasury select committee, claimed their deals are based on extremely thorough forward planning, taking account of all likely variations in interest rates and looking ahead five or seven years for an ultimately favourable outcome. Unless they were just making that up, most of the deals they have done in the past couple of years should be robust enough to ride out an interlude of higher rates, tighter consumer spending and City nervousness.

And as Anatole Kaletsky wisely pointed out in The Times this week, investors who decide to stop backing private equity funds have still got to put their money somewhere – and the ‘sovereign wealth funds’ of Asia and the Middle East that suddenly became controversial last week when China bought a piece of Barclays have an awful lot of money on which they want decent returns. So what we may see is a return to stock-market investment based on the underlying merits of blue-chip companies, rather than on the likelihood that they might be about to be bid for. That would be a healthy development too.

John Andrews, an investment professional and a regular contributor to our Spectator Business pages, has just emailed me this elegant summary of the current situation: ‘The markets have been strong for some time now and they always need – and find – a reason to fall, which inter alia allows for profit taking. Earlier this year it was jitters in China, now it’s sub-prime and the apparent end of cheap money. But if you take a long-term view, and are investing in the right way, it doesn’t matter. It’s the difference between investing in the stock market and investing in stocks.’ I couldn’t put it better myself, so I won’t. All I’d add is that since we’re not going to hell, or at least not yet, let’s enjoy whatever summer we can find."

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