Successful investing in 2008 will require good calls on a diverse basket of issues, such as liquidity, earnings, inflation, currency, and regulations, according to Standard Life Investments (SLI).
Successful investing in 2008 will require good calls on a diverse basket of issues, such as liquidity, earnings, inflation, currency, and regulations, according to Standard Life Investments (SLI).
In the latest edition of its Global Insight report, SLI examines why three inter-related issues - credit market problems, the outlook for corporate earnings, and inflation - will be vital for successful asset allocation in 2008.
The report suggests that the current situation cannot be compared to 1998 when hedge fund Long Term Capital Management lost billions in less than four months. The current crisis will take longer to sort out, SLI says, due to the wide array of risk holders, the opaque nature of many new credit instruments, and the interaction between weak housing markets and the broader economy.
'The spread between official interest rates and money market rates has begun to rise back towards the alarming levels seen in the late summer, especially in the UK,' said Andrew Milligan, head of Global Strategy for SLI. 'Our analysis emphasises that these issues are simply parts of a wider problem: a reassessment of the pricing and availability of a whole range of credit instruments, not just in the US but globally'.
Credit market de-leveraging will continue for both corporate and consumer borrowers, until an array of banks and non-bank financial institutions have brought their balance sheets back into order or much greater confidence returns with regard to what value to attach to such assets. All in all, a period of overly easy credit has ended, Standard Life said.
A second issue for investors to address is the outlook for corporate earnings. The research concludes that equity markets can hold up well in an environment of positive earnings growth, but if corporate profits actually decline then stocks can perform rather poorly. 'The key issue for equity investors in 2008 will be the direction of earnings, directly related in turn to whether the current liquidity crunch turns into a credit crunch. The consensus currently expects global profits growth of over 10% per annum. We expect this figure to be downgraded significantly, bearing in mind our forecasts of below-trend activity in most regions. A more difficult environment is still expected for 2008,' Milligan added.