Is This Really The End Of The Bull Market?
Worries over excessive debt levels in the US mortgage and private equity markets have provoked steep share-price falls.
The party has now ended as equity markets finally woke up to the growing problems in the debt markets. Shares in London and New York gave up all their gains for 2007 in the sharpest falls for nearly five years – the FTSE 100 finished 5.6% down on the week – and Thursday 26 July saw one of the most turbulent trading days in market history. Is this the end of the bull market, so long predicted by some commentators?
It was a wake-up call for investors who saw this reassessment of risk by the markets as a healthy development. The core concern relates to the so-called "sub-prime" US mortgage market: Sub-prime woes may slow the US economy, which has been the motor of global growth, while losses on mortgages at a time of rising interest rates threaten to spread through the financial system, sparking a clampdown on lending.
The credit crunch could in turn derail huge volumes of highly-leveraged private equity deals in the pipeline on both sides of the Atlantic – one of the first victims was the potential £7bn sale of Cadbury Schweppes US soft drinks business, which has been put on hold.
This episode will not blow over in just a few days and it could easily get much worse before it begins to stabilise. But we've seen its like before – including the Asian and Russian crises and the collapse of the LTCM hedge fund in 1998 – without either a recession or a prolonged equity bear market.
The same may happen this time because the underlying performance of the global economy and corporate profits remains strong, while inflation is basically under good control.
What's clear is that the bull market of 2003-2007, driven by reckless borrowing and careless lending, is dead. But what is less obvious is that its death could clear the way for a new surge of interest in companies with solid profits, strong balance sheets and no need for external cash.
As investors – including sovereign wealth funds from Asia and the Middle East – cut their allocations to high-risk buyout lending, the flow of money into blue-chip companies via the stock market will correspondingly increase.
The new bull market may be just starting – or as a headline in The Times put it: "Capitalism is safe and well (probably)."
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