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This is a short interim market commentary, as there will not be one in August.
It has been a remarkable couple of weeks, with the two key trends of the last year or so turned on their heads, with bank shares up and commodities down. One day the banking sector was down 25% and the next it was up over 30%. As we anticipated last month, the oil price has turned down, reflecting the reality of falling demand in the West in recent months plus the likelihood of demand falling in key emerging markets in months ahead. Other commodity prices are similarly rolling over, and the inflation bogeyman is beginning to be exorcised (at least for now).
We would expect more days of such crazy volatility, so don’t be surprised by lower stock market prices before a firm recovery can begin. In the meantime look out for increasing signs of outstanding value, such as the takeover by Santander for A&L, and the bid for UK commercial property company Minerva by an arm of the Dubai government.
Some of you may remember that back in our May commentary we defined “credit crunch”, something the media has more often than not failed to do. If we had a credit crunch it would mean that creditworthy customers were being turned away by their banks (as happened in the US in the 1930s), and this would mean that the banking system wasn’t working. This is something very different to banks being more discerning and deciding that, at difficult time in the economic cycle, they would like to raise the bar in terms of to whom they will lend.
On this definition we argued there had never been a credit crunch in the UK. Every week I ask a long term specialist mortgage broker “are you still able to get a creditworthy client a mortgage?”. Every week he tells me “yes”. In fact he is even encountering some more aggressive banks gazumping deals he has carefully brokered, going direct to the client and offering to beat all other offers. In recent weeks we considered buying new premises for our business, and there was a queue of banks prepared to lend money.
The banking system, now populated with a smaller number of more discerning banks, is alive and well. A number of banks will still need to raise more capital in the months ahead, but that is what happens when there is an economic downturn, and it doesn’t mean the banking system isn’t working.
We are now beginning to achieve, though in some cases through painful adjustment, what we all aspired to a year or so ago: a world with lower house prices, less debt, more efficient energy use, and less food waste. The markets are adjusting to give us lower house prices and less debt, and our behaviour (as businesses and consumers, not just UK but globally) has been changing dramatically since May/June this year to ensure less fossil fuels are used and we waste less food. These changes in markets and behaviour are the very positive foundation for the next stock market uptrend, and for the world as a whole.