Banks and Liquidity

December 04, 2011 | Posted by Michael Bailey

We commented on the volatility in world stock markets in August and the uncertain conditions have continued since then.  Interestingly, the FTSE 100 index has rallied from a low point around the 5,000 mark in August and then again in October, to almost 5,800 towards early November.  Despite this, the economic backdrop remains extremely uncertain.

Markets reacted with a collective shrug of the shoulders when it was announced in mid-week that Standard & Poors had downgraded a host of financial firms across the globe, including Barclays and HSBC.  Two Chinese banks were upgraded, ranking them as being more secure than the major US banks, although this has been met with surprise in some quarters due to speculation about the amounts of ’shadow’ banking and off-balance sheet lending in China.

The recent co-ordinated move by a group of the main central banks to improve lending and liquidity has caused a much greater positive short term reaction in world stock markets, although we have some reservations and indeed the decision may be indirectly linked to the bank downgrades mentioned above, with some commentators speculating that one of the major French or Italian banks may have been close to bankruptcy earlier this week.  More generally, a liquidity response to a solvency crisis may paper over some of the cracks which have emerged within the Eurozone but it is unlikely to be the ‘bazooka’ solution.

We believe that the next few months are likely to be difficult and investors should steel themselves for continuing volatility and a steady flow of negative news.  As ever, against such an uncertain background, it is important to maintain enough cash so that a long term view can be taken with investments.

We continue to encourage clients to speak to us, to ensure that their investment strategy is up to date and accurately reflects their views and objectives.

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