We are living in uncertain economic times
Despite the volatility induced by the implosion of the subprime mortgage market since the middle of the summer, most international markets are still showing positive returns, with the German market leading the way. Given the current background, such market behaviour may point towards naïve complacency.
The reality is that all US housing statistics are still suggesting an ongoing sharp fall in that market, posing a considerable risk to the US economy in general. Furthermore, it is clear we have not reached the end of the subprime mortgage crisis. On Wednesday, Merrill Lynch announced that it would take write-downs of $7.9 billion (€5.5bn) for collateralised debt obligations and US subprime mortgages. This was significantly larger than previously forecast. This news followed on from a Bank of America announcement last week, and indeed from a raft of major global financial institutions in recent weeks. The bad news is that further similar announcements are likely over the coming months.
With the previously reckless global financial system now under such pressure, it is virtually assured that global credit conditions will be much tighter in 2008 than recent years. There is now a risk of further weakening of the US economy over the coming months and recession cannot presently be ruled out. Clearly this US background will have negative implications for the rest of the global economy in 2008. It is not at all clear that equity markets are currently factoring in such possible future eventualities. Maybe they should.
Here in Ireland, the Irish market is not showing too many positive signs and is still under considerable pressure. Since last February, international equity investors have been running scared from Ireland and this has generated considerable selling pressures in the market. These pressures have been compounded by the heavy losses that many clueless Irish investors have suffered in the CFD (Contracts for Difference) market since it started to decline in February. It all adds up to a situation where there are still more sellers than buyers in the Irish market and as long as this persists, the market is not likely to go anywhere fast. Many Irish companies are now looking very cheap on valuation grounds, but potential buyers should be aware of the possibility that they might remain cheap for a prolonged period and could possibly get even cheaper.
In relation to the foreign property euphoria that has been evident here in Ireland for the best part of a decade, it is also become apparent that this bubble has been damaged. Foreign property shows are now attracting way fewer people than they would have, even a year ago. Many Irish investors are apparently becoming more cautious and more risk- averse, and are looking somewhat confused by the raft of products on offer and some recent high-profile news stories.
It all stacks up to a more uncertain investment environment than we have seen for some time. It is no harm that investors are starting to become somewhat more risk-averse, because a potentially dangerous situation was emerging. There is a distinct risk that some of the foreign property investments that have been flogged to a very unsuspecting but willing Irish investor, may not turn out to be ass good as the snake oil salesmen promised.
Investors need to be very careful in assessing the quality of the investment products on offer, and they should manage their risk through careful diversification. They should also remember that if an investment looks too good to be true, then it probably is.
