The Week
The Week, 04/09/09
The chill wind won't last
A chill wind blew through the country and the stock market to mark the start of September. Don’t worry, it won’t last long.
September roared in with over 130 points knocked off the FTSE 100 in the first three days of the month, spoiling the end-of-August spree when the index pushed once again above 4,900 points. This was, however, a reaction to the fact that the market had run ahead of itself over the previous two months rather than a full scale panic.
No-one need worry about dropping below 4,700 points when 3,500 loomed large earlier this year and indeed the market has picked up again and looks like ending the week on a sunnier note.
Finance ministers from the G20, the group of 20 most economically advanced nations, are meeting in London and already the talk is about managing the recovery rather than averting further disaster. With Japan, France and Germany all crawling their way out of recession and signs that manufacturing is at last expanding in the US and China, there is cause for cautious optimism.
One word of warning about Japan. The new Democrat government is something of an unknown quantity. After half a century of almost unbroken rule by the conservative LDP, we have an untried leftish opposition taking the reins of power. A previous attempt to teach the LDP a lesson by turfing it out of power was shortlived and so might this one be.
Do not expect any magic wand. Japan’s tax revenues are falling and plans to boost spending without increasing the budget deficit look increasingly like an impossible attempt to square the circle.
It will be interesting to see whether the G20 ministers feel it is necessary to continue to boost the global economy. I hope we shall see a scaling back of the drastic measures that were hastily introduced to avert financial meltdown and can see no merit in governments continuing to spend like there is no tomorrow. The lower the bill that we leave for the next generation to pick up, the better for the longer term.
It is hard to believe that 20 finance ministers can possibly agree on what to do next so the likelihood is that we will get a holding statement that says nothing and leaves the G20 leaders who meet later this month to fight it out.
The big fly in the ointment is the continuing desperate shortage of lending where it is most needed. The G20 itself has fallen well short of the £300 billion it promised to pour into the International Monetary Fund as emergency cash to lend to countries struggling in the economic crisis.
With cash at the IMF running dangerously low after a series of bailouts that included Iceland and Pakistan, the European Union has agreed to stump up the best part of £100 billion more, including nearly £7 billion from the UK. I hope we can afford it. Unfortunately we cannot afford not to help out if we are to avoid a second wave of worldwide recession.
Back home cash is still hard to come by. Figures released this week show that lending to businesses fell £8.4 billion in July to stand 2.9% below the level dished out in the same month last year. This confirms the view that quantitative easing is not working in the real world, only in the esoteric sphere of funding government finance.
Where businesses can get credit, they complain that the cost of borrowing from banks is rising.
There is, however, a glimmer of a sign that banks are starting to lend again. Two-year fixed rate mortgages are becoming available again and at rates running down to 2%, although as so often with banks there is a catch. So-called arrangement fees, which are nothing of the sort but are a sneaky way of bumping up the real interest rate, can run to £1,000 or more. The banks have learnt as much about plain dealing as the politicians.
One way or another I do, though, expect lending to ease modestly as the year continues through its second half and do not see tightness of money as being the major stumbling block to a surge in the stock market as 2009 heads towards its close.
The damper will be a new wave of rights issues, probably starting with bank group Lloyds and insurer RSA. This will be no bad thing, as it will reduce the reliance of companies on the fickle banks and give shareholders the opportunity to buy shares at less than the prevailing market price.
I remain optimistic. I have in the past found the amount of traffic on the M11 a remarkably accurate guide to the state of the economy. The road was almost empty back in February, when lorries were notably absent. It is heaving again and the trucks are back.
Morningstar is supporting the Institute of Financial Planning in promoting Financial Planning Week throughout 7-13 September. With the help of independent financial planners, we are encouraging you to ensure your finances are organised in accordance with your financial goals and offering you the opportunity to garner invaluable tips.
We will be asking you to participate in daily polls to be in with a chance of winning several prizes of free and independent financial advice and will also be publishing readers’ own case studies, complete with advice from independent financial planners. To offer up your financial planning question or scenario for assessment by an independent planner, simply e-mail editorial@hemscott.co.uk directly or fill out our form by clicking here. Check out Morningstar throughout the week to take advantage of these features, and much more.
Rodney Hobson
Author, Shares Made Simple and Small Companies, Big Profits