Investing Comment |
|
Your Money > Investing Comment Articles > Darkest hour before...
|
By Richard Hunter, Hargreaves Lansdown stockbrokers
The dawning of a new era in the form of the inauguration of US President Obama is a historic moment in American history. He has already recognised that one of his first and fiercest challenges will be to continue to fight the inexorable onslaught of a recession which continues to reverberate globally. The near total submission of UK banking shares, RBS and Lloyds in particular, in the earlier part of the week was not the reaction the Prime Minister had been hoping for. It is slowly being accepted that the range of measures announced in the second part of the bank rescue has some merit and may gain some traction in the coming months. During the course of these days, both RBS and Lloyds were marred by a number of trading suspensions during the day as the order book failed to match. It was not unusual to see the numbers of shares waiting to be traded showing a tenfold proportion of sellers over buyers - proof indeed that sellers were pushing against an open door and that there was an almost complete lack of buying support. This was the market's way of pricing in complete nationalisation. This was largely because the concerns around the UK banks unfortunately remain. Firstly, opinions have been voiced that the way to deal with the toxic assets which remain on various bank balance sheets would be to herd them together in their entirety and then set them to one side - the so-called "bad bank". Although this would effectively transfer the headache of first valuing and then disposing of these assets to the government, at least a line would be drawn in the sand from which the banks could move on. Instead, the government has effectively chosen to "insure" these assets, without giving actual numbers - an army of governmental lawyers and accountants will soon be descending on participating UK banks in an attempt to value this part of the scheme. This measure (which is similar to the US direction) is in theory cheaper and will only be of cost to the government if the insurance gets called on - but the reaction of the market in the early part of the week should leave nobody in any doubt that the market is taking no prisoners at the moment. For the banks, this continues to leave the spectre of toxic assets open-ended - even though the indiscriminate markdown of all UK banking shares may well have been a hasty step too far. Although they are becoming more difficult to find, there are still some optimists dotted around. Surely this latest savaging of the banks' share prices finally represents a watershed? In any event, the current unprecedented moves by Central Banks (quantitative easing) and governments (fiscal packages) will likely take some effect over the next six months, around the time that the aggressive interest rate cuts should also be fully washing through to the wider economy. Even if - as is widely expected - the US economy is the first to show signs of recovery in the second half of this year, the relief will be almost palpable. Any sense of renewed optimism would inevitably flow through to other markets as investors begin the job of trying to anticipate an end to the economic downturn. In the meantime, the jury remains out. Only time will tell whether these measures will have the desired effect and whether we are currently experiencing the darkest hour before dawn in investment terms. Certainly, for market participants and investors alike, the hope is that the renewed optimism surrounding the new President's arrival will be mirrored in global markets sooner rather than later. Richard J Hunter is Head of UK Equities and Hargreaves Lansdown Stockbrokers Useful links: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||